How Does the Electric Vehicle Tax Credit Work?

How Does the Electric Vehicle Tax Credit Work

The soaring cost of electric vehicles refrains people from buying one. But do you know the government provides incentives for the purchase of electric vehicles? The idea behind the program is to promote the purchase of electric vehicles by lowering the price of EVs close to the classic fuel-consumption car. 

In addition to the federal tax credit, state and municipal governments often offer financial incentives to consumers who purchase electric vehicles. Rebates, income tax credits, and excise or sales tax exemptions are a few examples of these incentives.

But which electric vehicle qualifies the tax bar? How much incentive does the government give? How does the electric vehicle tax credit work? If you are concerned about these questions, then you are not alone. We will answer these questions for you. 

What Is the Total Amount of Credit?

The incentive program was initiated in 2010, which offers $7500 to the buyers of electric vehicles. The program ensures incentives. It can bring the cost of electric vehicles close to fuel consumption vehicles. 

You will always hear when the incentive programs are discussed ‘up to’ a ascertain amount. But federal incentive on electric vehicles is not referred to as “up to.” Instead, the government provides flat $7500 credit. So, how does the electric vehicle tax credit work? Let us explain.

If the buy worth of a car exceeds $7500, the government pays off credit of $7500. Therefore, the incentive is only valuable if the tax bill exceeds $7500. If you are leasing the EV, then the amount of the federal tax incentive goes to the manufacturer, not you. 

The manufacturer can credit the amount by lowering the monthly payment. Although this is not compulsory and depends on your monthly payment cost.

What Are EV Tax Credits?

To understand how the electric vehicle tax credit works, you have to understand EV tax credits. The electric vehicle tax credit is the non-refundable amount that the buyer receives from the government to purchase an electric vehicle. 

Rules for EV Incentives

Here are some conditions that you must know:

  • As mentioned earlier, the credit goes to the manufacturer offering the lease, as the manufacturer is the car’s actual owner. This way, the manufacturer can provide your car at a lower monthly payment.
  • The grey area of the federal tax is a buyer to resell can’t get the federal tax benefit.
  • Plug-in and battery-electric vehicles should be manufactured with quality to become eligible for a $7500 tax benefit.
  • The car must be primary used in the United States.

Credits A Vehicle Needs to Qualify

A vehicle needs to qualify for the credit or incentive. The amount of credit or tax that an EV can be eligible for depends on the vehicle’s battery size. The electric car’s base incentive is $2500. In addition, $417 is provided as an incentive for every 5kWh battery. The total amount can reach up to $7500. 

Can the Vehicle Run Out of Tax Credit?

When an automaker sells above 200,000 units, it does not come under the federal tax credit. For example, Tesla hit this milestone in July of 2018. From that time, Tesla does not fall in the category of the federal tax credit. 

Vehicle That Qualifies for The Credit

The battery-electric vehicle and plug-in hybrid vehicles qualify for the tax credit—the government incentives all-electric cars with a curb weight below 14,000pounds and a large 5kWh battery. In addition, the vehicle must have an outside power source. These are the guidelines that qualify the car for tax credit work.


The initiative by the government to promote the use of electric cars has seen fruitful results. As a result, the rise of demand for electric vehicles is visible in the market. This article explains how the electric vehicle tax credit works and who benefits from the credit. 

A total of $7500 is offered to buyers who invest in an electric vehicle as a form of credit. It ensures that the buyers can be part of the transition to promote eco-friendly vehicles.

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Frequently Asked Questions

How many times can you claim the electric vehicle tax credit?

You can claim the tax credit on the current year in which you bought the car. The credit cannot be carried year after year or claimed more than once.

Can I claim the electric vehicle tax credit?

Yes, if you have purchased a plug-in hybrid electric car or battery-electric car, then you are eligible to claim the vehicle tax credit. For instance, if you purchased a vehicle in 2020, you could claim the tax return for 2020.

What is the tax benefit of an electric car?

The domestic electric car user pays only 5% of the electric tax. When fuel rates are soaring high, shifting to electric vehicles can put a brake on the financial strain. 

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