Learn the ins and outs of this potentially beneficial tax credit
As an increasing number of electric vehicles continue to be sold across the United States, the federal government sought a way to encourage consumers to purchase these vehicles. While electric vehicle owners save money on gas, the technology used in these vehicles is more expensive and can create a higher repair cost in the event of an accident or maintenance.
Combining this factor with the overall goal of reducing environmental emissions, the government implemented a tax credit to boost EV sales. So if you’ve seen ads for this tax credit before, don’t worry; it’s not a trick. In fact, you may be eligible for a certain credit on your tax return for the year you purchased the vehicle.
Navigating the different aspects of this beneficial tax credit can be challenging. Factors such as how much you can request, whether your vehicle is eligible, and when you need to request the credit are just a few examples of what you can expect.
Standard electric vehicles, those running on battery power alone, are eligible for up to $7,500 in tax credits, depending on your tax bill. The tax credit amount for plug-in hybrid electric vehicles varies depending on the battery size, with the lowest amount being $2,500.
Most EV models are eligible for the tax credit, but there are certain restrictions in place as outlined by the IRS:
You must purchase the vehicle brand new from the manufacturer
Based on these criteria, most standard electric vehicles and plug-in hybrids are eligible for the tax credit, but traditional hybrid vehicles are not. This is because traditional hybrid vehicles do not receive a charge from an external power source or plug.
The vehicle also needs to have been purchased after 2010, and you must be the vehicle’s first owner, which means that https://extendedautowarranty.com/news/best-used-electric-car-2022/if you purchased a used vehicle, you wouldn’t be able to receive the credit.
This beneficial tax credit is not permanent, as there is a cutoff based on how well the vehicle sells. Specifically, if the manufacturer sells 200,000 units of the vehicle, the tax credit no longer applies to it. For perspective, Tesla vehicles are no longer eligible for the tax credit due to the number of total units sold. However, vehicles such as the Nissan LEAF have not reached that cap after 10 years of sales because this is the only electric vehicle on the Nissan line.
The 200,000 sales cap is applied to a manufacturer as a whole, meaning the more electric vehicles a company sells, the faster it will hit the limit. Once at the 200,000 limit, the tax credit begins to reduce for roughly a year during a “phase-out” period. So if you’re considering purchasing a vehicle, contact the dealership to learn whether or not the EV model you are looking at is eligible for the tax credit.
The first step in utilizing the tax credit is filing for it when purchasing the vehicle. For example, if you purchase a new EV model in 2022, you must file for the tax credit when creating your 2022 tax return to be submitted in early 2023. It’s important to note that this is a tax credit, not a deduction, meaning it will not lower your taxable income.
Therefore, to utilize this tax credit, you need to owe the IRS at least as much as the tax credit amount. For example, you cannot request the full $7,500 if you only owe the IRS $4,000. Some people choose to create more tax liability by converting investments or using other strategies so that they can utilize the tax credit. Remember that you cannot request the credit later in the future, so the only window to use it is for the tax year you purchased the vehicle.
Anytime you make a new purchase, protecting that purchase should be at the top of your mind. Buying a new electric vehicle is no exception, and an auto warranty from a third-party provider can help. These warranty contracts can provide your EV model with accident reimbursements, maintenance protection, and overall component protection. To find an option best suited for your situation, read our reviews of top warranty providers to see viable options.
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