Thinking of upgrading to an electric vehicle? Act fast! Some plug-in electric vehicles (PEVs) will soon become ineligible for the main federal tax credit, and some are already ineligible (though the Biden administration is trying to extend these rebates and credits through the GREEN Act – more on this below).
Buying an EV or PHEV at the right time could make a significant difference to your purchasing power and the cost of buying an electric vehicle or plug-in hybrid. Understanding electric vehicle tax credits for 2021 is a little complex but absolutely worth your time if you’re serious about going electric. Here, I break down the federal tax credit and provide a comprehensive list of state EV rebates and utility company incentives.
Understanding your federal PEV tax credit eligibility
No matter where you live in the US, you may be eligible for the qualified PEV tax credit. This federal tax credit (Section 30D) was brought in as part of the Energy Improvement and Extension Act of 2008, amended as part of the American Recovery and Reinvestment Act of 2009 for vehicles acquired after December 31, 2009, and then modified by the American Taxpayer Relief Act (ATRA) 2form013 for certain 2 or 3 wheeled vehicles acquired after December 31, 2011 and before January 1, 2014. Whew. Two-wheelers and three-wheelers get a little more complicated, so for now let’s stick with how the rules apply for a four-wheel electric car or light truck.
The PEV tax credit applies when you buy a new PEV that:
- Draws propulsion using a traction battery that has at least 5 kilowatt-hours (kWh) of capacity
- Uses an external (plug-in) source of energy to recharge the battery
- Has a gross vehicle weight up to 14,000 pounds
- Meets specified emissions standards (i.e. the Clean Air Act and so forth).
In addition, your new EV must be purchased for use predominantly in the US, so if you’re a Snowbird flitting between Canada and the US, be careful not to fall foul of this loophole.
Leased vehicles are also eligible for the credit, but the company leasing the vehicle must apply for the credit, the idea being that the savings are passed on as a lower lease payment.
How much is the federal PEV tax credit worth?
The minimum federal PEV tax credit is $2,500 but could be as much as $7,500 depending in the PEV’s battery capacity, weight, and one other key factor we’ll discuss in a minute.
An EV with at least a 5 kWh battery capacity can snag you another $417, plus another $417 for each kWh above that 5 kWh threshold. Many EVs these days have a 100 kWh battery, which would easily max out that $7,500 credit. Even an EV with a much smaller battery capacity, say 16 kWh, would max out the tax credit. Let’s run the calculation for clarity:
- EV battery = 16 kWh
- Basic credit: $2,500
- Credit for 5 kWh battery: $417
- Credit for every kWh over 5: 11 x $417 = $4587
- Total: $7,504
- Credit available: $7,500
The IRS conveniently offers a breakdown of credits for every eligible electric vehicle under the current scheme. No calculations needed on your part!
Note that some newer models of vehicles have considerably increased tax credits, largely because the battery capacity has increased in more recent models. The 2020 Toyota Prius Prime, for instance, could net you a tax credit of $4,502 because of its 8.8 kWh lithium-ion battery pack. A 2012 Toyota Prius Prime would only get you $2,500 though, because the battery capacity is just 4.4 kWh, i.e. it doesn’t meet the 5 kWh threshold. The Toyota RAV4 currently maxes out the $7,500 credit.
How to apply for the PEV tax credit
The form you need to fill out for the federal PEV tax credit is actually remarkably simple. You can find the revised January 2021 version here. All you really need are a few details about your new EV (make, model, year, and so on), and figures for the phase-out, if applicable (more on this below).
The current list of electric vehicle manufacturers whose EVs are or were eligible for the tax credit can be found here. Bear in mind that some manufacturers have already had the tax credit phase-out initiated and others may become ineligible going forward (more on this below).
Which EVs aren’t eligible for the PEV tax credit?
In short, Tesla and GM! Seriously, though, Tesla and GM have both reached the magical (depending on how you look at it) number of 200,000 EVs sold, meaning that new EV purchases from these two companies no longer qualify for the tax credit.
That said, the Biden administration quickly introduced two bills to overhaul the federal tax credit for EVs. In addition to adding EV charging infrastructure, these bills look to increase the threshold for the number of EVs manufacturers like Tesla and GM have to sell before they stop qualifying for the tax credits. Significantly, the Growing Renewable Energy and Efficiency Now (GREEN) Act, introduced to Congress on February 4th, 2021 (a speedy two weeks after Biden took office!):
expands the qualified plug-in electric drive motor vehicle credit under Section 30D to apply a new transition period for vehicle sales of a manufacturer between 200,000 and 600,000 electric vehicles (EVs), under which the credit is reduced by $500. The provision replaces the current phaseout period (which begins at 200,000 vehicles) with a phaseout period that instead begins during the second calendar quarter after the 600,000-vehicle threshold is reached.
So, how will this work in practice? According to the bill:
At the start of the new phaseout period, the credit is reduced by 50% for one quarter and terminates thereafter. For manufacturers that pass the 200,000-vehicle threshold before the enactment of this bill, the number of vehicles sold in between 200,000 and those sold on the date of enactment are excluded to determine when the 600,000-vehicle threshold is reached.
Under the current system, the PEV tax credit is phased out in the second quarter following the calendar quarter in which the manufacturer sold a cumulative total of 200,000 qualified PEVs in the US. Sales are determined on a cumulative basis after December 31, 2009.
You can still claim the full credit up to the end of the first quarter after the quarter in which a manufacturer records its 200,000th qualified vehicle sale. If you buy your EV in the second and third calendar quarters, you can still claim up to 50% of the credit. For the fourth and fifth quarters, you can claim up to 25% of the credit. After that, you get diddly squat.
So, say you buy an EV in April that was eligible for the full $7,500 credit at the beginning of the year and the manufacturer recorded their 200,000th sale in January, you can still claim the full credit. But, if you buy the same vehicle in July, you can only claim half of the credit ($3,750). Buy the EV in October and you can still claim that $3,750, but by January of the next year you’re down to a quarter of the credit, or $1,875. By early summer, or June, that EV is no longer eligible for the credit.
The full phase-out already occurred for GM’s Chevrolet Bolt, Volt, and Cadillac CT6 Plug-in and ELR, for example, with these EVs becoming ineligible for the credit after the end of March 2020. The new bill would look to reinstate up to $7,000 in tax credits for these EVs.
Tesla reached the 200,000 milestone a little earlier. This means that all new Teslas became ineligible for the tax credit after the 1st of January, 2020. EV sales declined in 2019 (331,000 from 336,000 in 2018), and again in 2020 (296,000), with some analysts suggesting this was due in part to the phase-out of the federal EV tax credit for Tesla and, latterly, the coronavirus pandemic.
Again, the GREEN act introduced by the Biden administration would reinstate tax credits for Tesla EVs, and Platts Analytics has suggested that by 2025 annual EV sales will break the one million mark, increasing to more than 3 million units in 2030, and 6.6 million in 2035.
You can see cumulative and quarterly sales for a small number of manufacturers here. This gives you a good idea of the EV manufacturers likely to meet the current 200,000 cap soon. Cumulative sales of BMW EVs topped the 100,000 mark in 2020 (111,542), ad Ford reached the heady heights of 126,641 units sold. I’d predict that Ford will reach that 200,000 cap in the next three years or so, but with the new legislation being proposed and moved through the legislature, the race to 200,000 looks less important now. Assuming the GREEN Act passes, there will still be many hundreds of thousands of sales needed for these manufacturers to reach the proposed 600,000 threshold.
According to a US Treasury report, Nissan had cumulative sales of 151,861 as of June 5th, 2019, meaning they needed to sell just 48,139 more EVs before phase-out will be initiated under the current system. So, while last year I recommended that anyone looking at buying a Nissan Leaf in the next few years, did so sooner rather than later, chances are you’ll be just fine holding off a little longer, assuming the proposed legislation is adopted. That same Treasury report also offers a handy list of other manufacturers and their cumulative total sales.
Other things to note about the federal PEV tax credit
Bear in mind that this is a non-refundable tax credit. This means that if you’re eligible for a $2,000 credit but only owe $1,500 in tax, you’ll only receive a $1,500 credit on your return, and no refund. If your tax liability is zero, you will not receive the credit at all, even though you’re otherwise eligible for it. So, if this is a household car purchase, consider who has the greater tax liability and have them buy the car in their name, thus maximizing your potential credit. You might also want to think about using the tax credit to withdraw from retirement accounts or move money around your savings without having to pay additional taxes.
Also, if you’re self-employed and pay tax in instalments, consider making smaller instalments if you plan on buying an EV later in the year. Let’s say you expect to owe a total of $24,000 in taxes for the year (before the EV credit) and plan to pay instalments of $2,000 a month. If you plan to buy an EV that qualifies for the whole $7,500 tax credit, you may want to lower your monthly instalment payments to $1,375. Or, pay the higher amount and expect a nice refund at tax time!
As another example, if you don’t expect to pay more than $7,500 total in tax for the year but you have bought an EV that maxes out the credit, you might want to skip your monthly instalments entirely.
The only caveat here is that if you don’t end up buying an EV that’s eligible for the tax break, but you’ve underpaid all year, you’ll owe $7,500 come tax time.
Because there are so many factors in play when calculating taxes and I’m not a U.S. tax accountant, please check with your financial advisor or accountant to figure out what’s best for your individual circumstances.
What about tax credits for two-wheeler and three-wheeler EVs?
So, you bought or are thinking of buying an EV with just two or three wheels. Happily, you can also claim a federal tax credit, with a few caveats.
The American Recovery and Reinvestment Act (ARRA) of 2009 created a tax credit for these atypical EVs. This act was then modified by the American Taxpayer Relief Act (ATRA) 2013 for certain two- or three-wheeled vehicles acquired after December 31, 2011 and before January 1, 2014.
The two- or three-wheeled plug-in electric drive motor vehicle tax credit had been extended through December 31, 2020 by Public Law 116-94. I haven’t been ale to find specific mention of a further extension of this tax credit, but it seems to still be in place, making me think it was covered under the general extension of the provision in H.R.8337 – Continuing Appropriations Act, 2021 and Other Extensions Act.
This credit continues to be available for the purchase of a new qualified two- or three-wheeled plug-in electric drive vehicle that:
- Draws propulsion using a traction battery that has at least 2.5 kilowatt hours (kWh) of capacity
- Uses an external source of energy to recharge the battery
- Has a gross vehicle weight rating of up to 14,000 pounds
- Is manufactured primarily for use on public roadways
- Can drive at least 45 miles per hour.
The credit is for 10% of the cost of the qualified vehicle, up to $2,500. To apply for the credit, you’ll need IRS Form 8936, which is available on the IRS Forms and Publications website.
What about state tax credits for EVs?
The federal government isn’t the only provider of tax credits for EVs. Some states have their own incentives, including Colorado and New York. Some states, short of providing a tax break, at least give you access to the carpool lane if you have an EV. Other states have either never had a program or have phased out incentives.
The states not currently offering tax credits comprise (utility company rebates are in parentheses):
- Illinois (the Illinois Electric Cooperative offers Plug-In Electric Vehicle (PEV) Financing and Charging)
- Indiana (there are two charging rate incentives though, from Indianapolis Power & Light and Indiana Michigan Power)
- Iowa (three utility companies offer incentives: Alliant Energy, MidAmerican Energy, and Central Iowa Power Cooperative)
- Michigan (though private utilities offer incentives, including charging rebates from DTE Energy and Consumers Energy, charging and infrastructure rebates from Indiana Michigan Power and Lansing BWL and specific infrastructure rebates from DTE Energy and Consumers Energy too)
- Mississippi (check out the EV charging equipment incentive from Entergy though)
- Nebraska (no state tax credit, but there is a loan program – Alternative Fuel Vehicle (AFV) and Fueling Infrastructure Loans – and the OPPD utility company provides an All-Electric Vehicle (EV) and Electric Vehicle Supply Equipment (EVSE) Rebate)
- New Hampshire (though private utilities offer incentives, including NV Energy and NHEC for PEVs, EVSE, and charging rates)
- North Dakota
- Oklahoma (there’s an EVSE rebate from Public Service Company of Oklahoma though)
- Rhode Island (though there are a couple of utility discounts from Warren and People’s Power & Light and some new EVSE programs for 2021)
- South Carolina
- South Dakota
- Tennessee (check out the EVSE rebate from Knoxville Utility Board)
- Virginia (though they offer a High Occupancy Vehicle (HOV) Lane Exemption and there’s a charging rebate from Appalachian Power Company)
- West Virginia
- Wisconsin (no state incentives, but EVSE rebates from Pierce Pepin Cooperative Service, Riverland Energy Cooperative, Price Electric Cooperative, East Central Energy, Clark Electric Cooperative, Chippewa Valley Electric Cooperative, Barron Electric Cooperative, and Madison Gas and Electric, who also offer a Plug-In Electric Vehicle (PEV) Charging Rate Incentive.
At the time of writing, these are the states offering electric vehicle tax credits, with basic details of the programs and links to more information. Make sure to check eligibility and availability before buying an EV as these programs are subject to change and many credits are being phased out.
Arizona offer a whole whack of incentives for EV users. These include an exemption from emissions tests, as well as incentives on licensing, charging, parking, and more. There are also incentives from utility companies to install charging stations (up to 75% of costs!). Check the AFDC for more info if you live in Arizona.
If you live in California and are thinking of buying an EV, get ready to do some reading. The state (and various private companies) offer a boatload of programs and incentives to work your way through. There are various PEV charging reduction rate incentives, HOV lane exemptions, and more, with specific programs for different counties. You can check all of these California programs at the AFDC.
One new EV tax incentive program for 2021 is a PEV rebate program across the state of California. Under this program the California Air Resources Board offers point of sale rebates of up to $1,500 for the purchase or lease of a new all-electric or plug-in hybrid electric vehicle through the Clean Fuel Reward Program. Eligible PEVs must have a minimum battery capacity of 5 kilowatt-hours and be purchased from participating retailers. Eligible customers must reside in California and register the PEV in California. For more information, including vehicle eligibility requirements, see the Clean Fuel Reward website.
Compared to California, Colorado is a little less, shall we say, confusing, for EV rebates, grants, and such, with some generous programs to which you can apply. These don’t appear to have changed for 2021 and can be seen at AFDC.
Connecticut has a handful of rebates, exemptions, reduced fees, and loans for charging infrastructure for EVs in the state, with no new programs for 2021. The current roster of incentives for EVs (and hydrogen powered cars!) can be see at AFDC.
Delaware offer EV rebates on the vehicles themselves and on charging infrastructure, as well as a vehicle-to-grid energy credit! Programs are listed at AFDC and there are currently no new programs for 2021.
District of Columbia
The District of Columbia doesn’t offer a straightforward tax credit for EVs but does offer other types of incentives such as conversion and infrastructure tax credits, and title excise tax exemptions. You can see all the current programs at AFDC, with no new programs for 2021 so far.
Florida aren’t especially generous about EVs, but they do have some incentives for infrastructure. Thankfully, there are more generous incentives provided by utility and private programs. These can all be seen at AFDC.
Programs for EV incentives in Georgia include HOW lane exemptions, charging infrastructure rebates, and others. Unfortunately, Georgia Power;’ EVSE rebate program expired at the end of December 2020. You can see all the current programs at AFDC.
Hawaii doesn’t have an EV tax credit specifically, but does offer other incentives, including a charging station rebate through utility and private providers. There were no new updates so far in 2021 and all current programs can be seen at AFDC.
New to the fold in 2021, Idaho now offers a handful of state, utility, and private programs to incentivize the purchase and use of EVs. These include:
Medium- and Heavy-Duty Diesel Vehicle Replacement Rebates
All current programs for EV incentives in Idaho can be seen here.
Louisiana offers a non-refundable income tax credit of 10-30% of the cost of qualified clean-burning motor vehicle fuel property, including EVs: Alternative Fuel Vehicle (AFV) and Fueling Infrastructure Tax Credit. There are also some utility and private incentives for EVs and charging infrastructure. See all the current programs at AFDC.
Sadly, a slew of the incentive programs in Maryland expired in 2020, including the PEV tax credit. The state does still offer some incentives though, as do various utility companies. You can see the updated offerings at AFDC.
State and private companies offer incentives for EV purchasers and users in Massachusetts, with two new programs already introduced in 2021 to complement their existing EV rebates: up to an 80% grant under the Direct Current (DC) Fast Electric Vehicle Supply Equipment (EVSE) Grants and Zero-Emission Truck Rebates (added in March, 2021, and applicable to public and private fleets). You can see all the programs at AFDC.
Minnesota don’t offer a specific EV tax rebate or credit but they do have an Electric Vehicle (EV) Toll Credit Pilot Program that could help offset some costs. In addition, several utility companies offer incentives, with all current programs listed at AFDC.
Montana only offer one incentive, the Alternative Fuel Vehicle (AFV) Conversion Tax Credit, which maxes out at $1,000.
There’s a pretty comprehensive push to promote electric vehicles in New Jersey, including a host of incentives and rebates for EV users. These include a Plug-In Electric Vehicle (PEV) Rebate Program and others that can be seen at AFDC.
There’s currently just one incentive in New Mexico, for EV charger installations, under the Electric Vehicle Supply Equipment (EVSE) Funding program. All utility and private programs can be seen at AFDC.
New York has a handful of EV incentives in place, including a Plug-In Electric Vehicle (PEV) Rebate Program, though perhaps not as many as you’d expect. Current programs, including those from utilities, can be seen at AFDC.
North Carolina are a tad stingy about EV incentives, but they do offer a High Occupancy Vehicle (HOV) Lane Exemption. A couple of organizations also offer incentives for EVSE infrastructure and charging. You can see all of these at AFDC.
Oregon offer a pretty generous Plug-In Electric Vehicle (PEV) Rebate where new PEVs with a battery capacity greater than 10 kilowatt-hours (kWh) are eligible for a rebate of $2,500 and new PEVs with a battery capacity of less than 10 kWh are eligible for a rebate of $1,500. Oregon residents that meet low or moderate household income requirements are eligible for rebates of $2,500 for the purchase or lease of used all-electric vehicles (EVs) and $5,000 for the purchase or lease of new EVs. The state also has a number of EVSE rebates and incentives available through various utilities. You can see these at AFDC.
Pennsylvania offer an Alternative Fuel Vehicle (AFV) Rebate, with a top-up available for low-income households. Several PEV rebates are also available through various utilities. You can see the updated list for 2021 at AFDC.
Texas provides Light-Duty Alternative Fuel Vehicle Rebates up to $5,000 for up to 1,000 applicants or plug-in hybrid EVs up to $2,500 for the first 2,000 applicants. There are also several utility company incentives for EVSE and so forth. You can see the updated list at AFDC.
Utah’s incentives aren’t super impressive unless you buy a heavy-duty EV, but there is an Alternative Fuel Vehicle Decal and High Occupancy Vehicle (HOV) Lane Exemption and a Qualified Heavy-Duty Alternative Fuel Vehicle (AFV) Tax Credit. Several utilities also offer PEV credits and rate reductions as well as EVSE rebates. Check out the latest incentives at AFDC.
Vermont has some pretty generous incentives for anyone purchasing an EV. For most households, a PHEV can bag you a $1,500 rebate while an EV can get you a $2,500 rebate. For lower income households, these rebates amount to $4,000 and $5,000 respectively for PHEVs and EVs. A range of utility companies also offer generous incentives. See all the details for Vermont’s EV rebates and credits at AFDC.
Washington offers a Retail Sales Tax Exemption of 6.5% for new or used passenger vehicles, light-duty trucks, and medium-duty passenger vehicles that are exclusively powered by an alternative vehicle fuel or are capable of running solely on electricity for at least 30 miles. The maximum amount will gradually decrease up to 2025, so if you live in Washington upgrade sooner rather than later.
There’s also one utility offering an incentive, the Plug-In Electric Vehicle (PEV) Charging Study Incentive from Tacoma Public Utility (TPU), and various other programs linked to utilities. See the 2021 updated list at AFDC.
Bear in mind that because some utility companies offer generous rebates to residential customers purchasing an EV and installing charging stations, it may be financially advantageous to switch your utility provider in advance of buying an EV. Make sure to read the fine print though, as some utility companies may require you to have been a long-term customer to qualify for their program.
I’ve tried to provide a pretty comprehensive run-down of state and federal EV tax credits on this page, updated for 2021, but If you know of a rebate not listed here, or spot anything that’s incorrect, please get in touch.