With high gas prices and inflation hitting consumers in their pocketbooks, those in the market for a new vehicle may be considering alternatives to gas-fueled transportation. A tax credit may be just the incentive they need to make the switch to electric vehicles (EVs).
Gas Price Inflation
Gasoline continues to increasingly consume Americans’ disposable income. The national average for gasoline last summer was slightly over $3 a gallon; in 2022 this price average is significantly higher! However, taxpayers who purchased EVs from certain manufacturers that meet the right qualifications have an opportunity to reduce both their gas costs and tax bills with the EV tax credit.
EV Tax Credit
The Internal Revenue Service (IRS) currently allows a $7,500 maximum EV tax credit for fully electric or plug-in hybrid cars. This serves as a deduction against taxes owed in the tax year the vehicle purchase was made. The unused part of the EV tax credit is lost, as it does not roll forward for use in future years. Plug-in hybrids may max out at $4,500 due to a smaller battery—battery capacity is taken into account in determining the credit calculation.
EV qualifications include the following:
- Must operate on four wheels
- Must weigh 14,000 lbs. or less
- Must have a battery that provides 4 kilowatt-hours (kWh) or more of power
- Must be charged from an external source (plug-in)
- Must be a new vehicle
- Must be purchased and used in the U.S. (leased vehicles do not qualify for the EV Tax Credit)
Taxpayers must file IRS Form 8936 with their federal tax returns to ensure the tax credit is applied.
Eligible EV Manufacturers
After an EV manufacturer has sold its first 200,000 EVs, the tax code begins to phase out the credit. Phase-out decreases the credit by 50%, then another 25% for each half of the year after the sales cap has been determined by the IRS. The 200,000 cap is not an annual threshold. For example, Ford has been working toward manufacturing 200,000 EVs since 2012, and is expected to reach its phase-out cap in 2022. Once it does, those who purchase Ford EVs will not be able to receive the credit. Likewise, consumers who purchase a Tesla or General Motors EV would not be eligible to receive the credit because those manufacturers have already reached the limit. Toyota is also phasing out, while Nissan is expected to reach its eligibility volume cap soon.
Other Incentives
State governments and local utilities also have incentives in place for the conversion to electric transportation, including at-home charger discounts averaging $700, and state rebates of $2,000. These incentives vary by region. In Tennessee for example, the Knoxville Utilities Board offers an Electric Vehicle Charging Station Rebate of up to $400. Learn more about this and other incentives here. Contact one of our executives below for details about incentives in your area.
Closing News
President Joe Biden has proposed increasing the credit to $12,500 (with lobbying participants such as Toyota), but this proposal has been met with strong opposition. PYA will monitor this proposal for our clients.
If you would like to speak with a tax professional about the EV tax credit or need guidance related to this or any business advisory or tax planning and strategy matter, one of our executive contacts would be happy to assist. You may email them below, or call (800) 270-9629.
