The IRS has been diligently introducing and maintaining tax credits to promote energy efficiency since 2008 when it added Section 30D to the Internal Revenue Code (IRC). The section is a provision for the Qualified Plug-In Electric Drive Vehicle tax credit, first provided for by the Energy Improvement and Extension Act of 2008. The Act was amended a year later, and then changed again in 2013 to include a limited number of additional vehicles.
This flurry of legislation addresses a growing concern across the globe—the impact of greenhouse gas emissions on the climate. The National Conference of State Legislators (NCSL) reported that 28% of the nation’s greenhouse gas emissions as of 2021 are linked to transportation.
While the expense of purchasing an alternative-fuel vehicle can be high, the positive impact on the environment, as well as the potential tax credit you can receive, might make it worth it. Here’s what to know before you buy.
The Qualified Plug-In Electric Drive Vehicle Tax Credit
This tax credit ranges from $2,500 to $7,500, as of 2021. To qualify, the following criteria must be met:
- It’s an all-electric or plug-in hybrid vehicle
- It has four wheels
- You didn’t lease the vehicle
- You purchased a new vehicle (used vehicles don’t qualify)
- You purchased it for your personal or business use, not for resale
- The vehicle was manufactured in 2010 or later
- It’s driven primarily in the U.S.
The manufacturer must also certify that the vehicle meets additional criteria, such as:
- The vehicle originated with the manufacturer—it’s not a conventional vehicle that was converted
- Title II of the Clean Air Act defines it as a motor vehicle
- Its battery has a capacity of at least 4 kilowatt hours and it can be recharged from an external source
- Its gross vehicle weight rating doesn’t exceed 14,000 pounds
“Neighborhood” Vehicles Have Their Own Credit
“Neighborhood” electric vehicles (two- and three-wheelers) don’t qualify for this tax credit, but they have a credit of their own under Section 30D(g) of the IRC. The vehicle must have been purchased in 2012 or 2013, and the tax credit is worth 10% of the purchase price up to a maximum of $2,500.
How the Tax Credit Works
The Plug-In Electric Drive Vehicle credit begins at $2,500, and that amount can increase based on the battery’s capacity. You get an additional $417 if the vehicle has a capacity of 5 kilowatt hours, and an additional $417 for each kilowatt hour beyond that. The amount is capped at $7,500 per vehicle.
Some Phaseouts Apply
A tax credit is said to “phase out” when it becomes smaller and eventually unavailable as certain criteria are met. This usually means that the taxpayer has surpassed income limits. For example, a certain tax credit might start to phase out when your adjusted gross income (AGI) hits $150,000. It then phases out entirely—you can’t claim it at all—if your AGI reaches $175,000.
This tax credit is different. It doesn’t phase out based on your income, but rather on the manufacturer’s sales of qualifying vehicles.
The phaseout begins when a certain manufacturer sells 200,000 qualifying vehicles in the U.S. This isn’t 200,000 per year, but rather a cumulative total beginning as of Jan. 1, 2010, and it’s all qualifying vehicles sold, not just your model. The phaseout begins two calendar quarters after the manufacturer reaches this benchmark.
Two manufacturers—General Motors and Tesla—have already reached sales of 200,000 or more as of April 2021. This means taxpayers are no longer eligible for the tax credits.
There’s really no way to know in advance exactly how much your tax credit will decrease. You’ll have to wait for the IRS to announce that the manufacturer has reached this 200,000 threshold. They’ll also officially release a schedule for phasing out the credit over the period of a year. It’s typically a 50% reduction if you buy the vehicle in the first two quarters of the phaseout period. However, it then drops to 25% in the third and fourth quarters. A vehicle you purchase after this phaseout period won’t qualify for the credit.
How to Claim the Federal Tax Credit
You can claim the IRC 30D credit—or the IRC 30D(g) credit—for the tax year in which you purchased and began driving the vehicle. For example, you would have to have purchased the vehicle and started driving it in 2020 in order to claim the tax credit on your 2020 tax return that you file in 2021.
Claiming the tax credit involves completing and filing both Schedule 3 and IRS Form 8936 with your tax return. Form 8936 will calculate your credit, which you can then enter on line 6 of Schedule 3. You would transfer the total from lines 1 through 7 on Schedule 3 to line 20 of your Form 1040 tax return.
Complete and submit Form 8834 instead if you’re claiming the IRC 30D(g) credit for a two- or three-wheeled vehicle.
Form 8936 includes a section (Part III) for personal use of the vehicle, and another section (Part II) for business or investment use. You must additionally complete and submit Form 3800, “General Business Credit,” if you purchased the vehicle for business or investment use. If you’re subject to the Alternative Minimum Tax, you can still claim this credit.
State-Level Tax Credits
The majority of states and Washington, D.C. have joined in on the clean-air bandwagon as well, so you might not be limited to just the federal tax credit. According to the NCSL, there is typically some kind of incentive offered for purchasing this type of vehicle, and some of these perks are tax credits.
Other incentives may include utility rate reductions, registration fee reductions, and exemptions from emissions testing.
As of April 2021, the majority of states offer tax credits or policies for electric or hybrid vehicles. For states that do not, you’re limited to the federal tax credit.