How to Calculate the Federal Tax Credit for Electric Cars

February 23, 2022

Federal Tax Credit and Electric Car Battery Size

As you may be aware, the Federal government in the United States gives you tax credit when you purchase a plug-in hybrid, or all-electric car. You can take up to $7,500 off the price of the vehicle just from this one tax credit alone. And there are state and local incentives and rebates that you can add to your savings.

However, how much you can get from the Feds depends on the size of your EV’s battery pack. With that in mind, here’s our quick guide to understanding the rules on the Federal Tax Credit for EVs.

How to Calculate Electric Car Federal Tax Credit

First of all, in order to get the full $7,500 tax credit from the Federal government, your tax bill at the end of the year has to be $7,500 or more. If you buy an EV this year and at the end of the year, you only owe the government $5,000 in income tax, you’ll only get that $5,000 taken off your taxes.

On the other hand, if you lease an EV, the tax credit goes to the automaker, not you. The manufacturer will factor in the entire tax credit amount into the cost of the lease to lower your monthly payment.

As we mentioned, the Federal Tax credit is based on the size of the battery pack in your EV and $7,500 is the cap, the most you can get for your tax credit. For some models, that means the credit can fall well below $7,500. For instance, the Toyota Prius Prime has an 8.8 kWh battery. The Feds give you $2,500 for a battery that is at least a 5 kWh battery. They add $417 because you own a car that has a battery pack and then they add an addition $417 for every kWh more your battery pack is over 5 kWh. In the case of the Toyota, that means you get $1,585 added for the amount the battery is over 5-kWh and the total amount of your tax credit will be $4,502.

The image above show the formula to go by, sand how it shakes out according to the Internal Revenue Service.

Is the Federal Tax Credit Going Away?

Also keep in mind that this Federal Tax Credit is a limited time offer. It is meant as an incentive to get people into electric vehicles and will phase out once the automaker has sold 200,000 EV units. In other words, you can no longer get this tax credit if you buy a Tesla as that company reached the 200,000 milestone in July 2018. General Motors which makes the popular Chevy Bolt, reached its limit in December 2018. So, no more tax credit for the Bolt.

Other automakers that are getting very close to that 200,000 units sold mark include Toyota, Ford, and Nissan. Other manufacturers who are close to the 199,000 mark of EVs sold include Mazda, Lucid Motors, Rivian, Land Rover, Subaru, and Jaguar. If you’d like to take advantage of the Federal $7,500 tax credit on your EV, the time to strike is now!

To see the available tax credit amount for every EV in the US, visit the GreenCars EV Incentives page.

As of this writing, you can still get the full $7,500 for all-electric models by Audi, BMW, Ford, Hyundai, Jaguar, Kia, Mini, Nissan, Polestar, Porsche, Volkswagen, and Volvo.


Federal Tax Credit Details and Other Regional Incentives

Other conditions you should know about the Federal Tax Credit for EVs is that it is not available to an electric vehicle that is being purchased strictly for resale. The vehicle must be primarily used in the United States. Plug-in and all-electric vehicles must be built by qualified manufacturers and the tax credit cannot be passed onto a secondary buyer. The vehicle must have battery packs that are rated for at least 4 kHw of energy storage and must be capable of being recharged from an external source. And lastly, the IRS reserves the right to reject a claim for a tax credit because, well… they are the IRS.

There are also dozens of state and regional incentives for plug-in hybrid and all-electric vehicles. Many states have at least a dozen programs, though many only apply to businesses that are going green. Some credits include exemptions from fees and inspections, or for carpool lane access, free parking, reduced vehicle taxes and lower registration fees.

California is leading the country in EV acceptance, offering a $1,500 cash rebate for anyone buying or leasing a new EV under California’s Clean Fuel Reward program. Even Hydrogen Fuel Cell vehicles qualify for incentive in some states.