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 the impact of greenhouse gas emissions on the climate. The National Conference of State Legislators (NCSL) reported that 29% 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 is between $2,500 and $7,500 for electric and hybrid vehicles that qualify.
- You can only get the tax credit for purchasing a new car, not for leasing a new car or buying a used one.
- The credit begins to phase out when a certain manufacturer sells 200,000 qualifying vehicles in the U.S. across all of their electric and hybrid models.
- Many states and the District of Columbia offer incentives for purchasing electric and hybrid vehicles, including tax credits.
The Qualified Plug-In Electric Drive Vehicle Tax Credit
This tax credit ranges from $2,500 to $7,500, depending on the type of battery and its capacity. The following criteria must be met in order to qualify:
- 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.
- The battery can be recharged from an external source.
- Its gross vehicle weight rating doesn't exceed 14,000 pounds.
The IRS provides a list of qualifying vehicles on its website, including:
|Honda||Accord Plug-In Hybrid||2014||$3,636|
|Clarity Plug-In Hybrid||2018, 2019, 2020, 2021||$7,500|
|Nissan||Nissan LEAF||2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022||$7,500
|Toyota||Prius Prime Plug-in Hybrid||2017, 2018, 2019, 2020, 2021, 2022||$4,502|
|Prius Plug-in Electric Drive Vehicle||2012, 2013, 2014, 2015||$2,500|
|RAV4 EV||2012, 2013, 2014||$7,500|
|RAV4 Prime Plug-In Hybrid||2021, 2022||$7,500|
|Lexus NX Plug-In Hybrid||2022||$7,500|
|Hyundai||Sonata Plug-in Hybrid Electric Vehicle||2016, 2017, 2018, 2019||$4,919|
|Tucson Plug-In Hybrid||2022||$6,587|
|Santa Fe Plug-In Hybrid||2022||$6,587|
|Ioniq 5 Electric Battery Vehicle||2022||$7,500|
|Ford||Focus Electric||2012, 2013, 2014, 2015, 2016, 2017, 2018||$7,500|
|Fusion Energi||2013, 2014, 2015, 2016, 2017||$4,007|
|Fusion Energi||2019, 2020||$4,609|
|Escape Plug-In Hybrid||2020, 2021, 2022||$6,843|
|Mustang Mach-E Select (AWD, RWD models)||2021, 2022||$7,500|
|Subaru||Crosstrek Hybrid||2019, 2020, 2021||$4,502|
"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. That amount can increase based on the battery's capacity. You get an additional $417 if the vehicle has a capacity of five kilowatt-hours. You'll receive 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 January 1, 2010. This number counts 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, so tax credits for those vehicles are being phased out by the IRS.
There's 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.
The phaseout is typically a 50% reduction if you buy the vehicle in the first and second 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 need to have purchased the vehicle and started driving it in 2021 to claim the tax credit on the 2021 tax return that you file in 2022.
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 6f 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 your 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. You can still claim this credit if you're subject to the Alternative Minimum Tax.
State-Level Tax Credits
The majority of states and the District of Colombia also offer incentives for electric or hybrid vehicles, so you might not be limited to the federal tax credit. There are different benefits available in each state, some of which are tax credits. Other incentives may include utility rate reductions, registration fee reductions, and exemptions from emissions testing.
As of 2021, the majority of states offered tax credits or policies for electric or hybrid vehicles. You're limited to the federal tax credit for states that do not.
National Conference of State Legislatures. “State Policies Promoting Hybrid and Electric Vehicles.”
U.S. Department of Energy. "Federal Tax Credits for New All-Electric and Plug-in Hybrid Vehicles: Requirements."
IRS. “Instructions for Form 8936,” Page 2.