Claiming the $7,500 Electric Vehicle Tax Credit: A Step-by-Step Guide

Honda Clarity Plug-In Hybrid qualifies for the full EV tax credit because of its battery size. | Honda

If reducing carbon emissions and eliminating the use of gasoline are your goals, buying an electric vehicle is the way to go. However, there’s been a clear problem with the EV segment since 2010: not enough range for the money.

We can confidently say that’s changing, and by 2019 we will get several more models featuring over 200 miles of range at reasonable prices. Already, there are enough models that become affordable (under $23,000) once you apply the full $7,500 EV tax credit.

But how do you apply for that credit, and who qualifies to claim it? This part of the process can be confusing. Here are the details for knocking as much as $7,500 off the cost of an electric car.

1. Choose an EV that qualifies.

First, you need to make sure the plug-in model you are buying qualifies for the full credit. Every all-electric vehicle released in recent years (e.g., Nissan Leaf, Ford Focus Electric, Chevrolet Bolt EV) will work. But the list doesn’t end there.

Long-range plug-in hybrids like the Chevrolet Volt, Chrysler Pacifica Hybrid, and Honda Clarity Plug-in Hybrid also qualify for the $7,500 credit. The U.S. Department of Energy keeps an up-to-date list of how much each plug-in car qualifies for in credits.

Plug-in hybrids with lower range, including the Toyota Prius Prime ($4,502) and Kia Optima Hybrid ($4,919), qualify for lesser but still substantial credits.

2. Make sure the automaker still has credits available.

Each automaker has a cap of 200,000 sales as far as tax credits are concerned. After that point, buyers have six months to continue receiving the $7,500 credit when they buy that brand of EV. For the following six months, buyers can claim half the credit ($3,750), followed by another six months in which they can claim half that amount ($1,875).

Tesla Model X

Credits on Tesla EVs begin phasing out in 2019. | Tesla

So far, Tesla is the only automaker to have its customer credits begin to phase out. Starting in 2019, the maximum credit will be $3,750.  General Motors will be the next (likely in 2019), followed a few years later by Nissan (possibly in 2020). The Dept. of Energy site that lists tax credit amounts also notes the schedule for the credits to phase out by automaker.

3. Obtain a letter of certification from the dealer.

The IRS sends a letter of certification to automakers that notes the make, model, and year of the EVs it sells that qualify for credits. When you buy a plug-in car, the dealer will give you a copy.

One note of caution during this step: Since the IRS certificates may be sent before new legislation is passed by Congress, you should confirm the vehicle qualifies before the purchase process.

4. Estimate your tax obligation for that year.

When you go to claim the $7,500 credit, the amount will come from your tax obligation for that year. If you owe (or already paid) less than $7,500 in taxes, you won’t be able to claim the entire amount. Instead, you will be able to deduct as much as you owe until you get to $0.

For example, if you buy an EV in 2019 but only owe $6,500 in taxes, that’s the most you can deduct on your federal tax filing.

5. IRS forms

To claim the credit, you need to fill out IRS Form 8936. At a glance, it will appear simple, straightforward, and brief. Unfortunately (as is the IRS’s wont), the instructions complicate things to the extreme, so stick to the form itself unless you have a specific question.

IRS Form 8936 | IRS

With the vehicle identification number (VIN) and certificate from the dealership, the first part will be easy. After that (Part III, assuming the car was not a business investment), you’ll go through the process of subtracting the credit from your taxes owed on Form 1040, line 47.

Hopefully, that number exceeds $7,500 for the tax year. If you have state EV tax credits available, you’ll hope the number is higher.

6. Claiming state rebates and credits on top

As of September 2018, there were seven states offering $2,000 or more in EV incentives on top of the $7,500 from the feds. In Connecticut ($3,000) and Delaware ($3,500), the incentives are rebates and can be deducted from the price of the vehicle regardless of taxes owed.

However, in Colorado, which offers the highest incentive ($5,000) on top of the federal credit, you’d have to owe $12,500 in taxes to claim the full amount.

The program in place in California helps out low-income buyers who may not be able to claim thousands in tax credits. There, up to $7,500 in state and local rebates can knock that amount off the price of a new EV.

If you have a question about your specific tax situation, your accountant would be the one to ask.

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