Electric Cars: Good for Your Tax Return!

In the beginning, the only purpose of the United States income tax was to raise revenue to fund the government. Since that time, our legislators have learned that they can influence people’s behavior by giving them carrots (like tax deductions for mortgage interest to encourage home ownership) or applying sticks (like “sin” taxes on things like alcohol and cigarettes). It seems then that the government now wants you to buy electric cars…by giving you a federal tax credit for doing so.

And no argument from me! In fact, I’ve had my eye on the Tesla Model S for some time. If you haven’t heard of the Tesla Model S by now, here’s a quick synopsis:

• It’s fast
• It’s comfortable
• It looks great
• It received the first-ever 99 out of 100 from Consumer Reports
• It doesn’t use a drop of gas

And, yes, it qualifies for that federal credit. But, don’t be discouraged if you don’t want a Tesla. Many other cars qualify, too.

Qualified Plug-in Electric Drive Motor Vehicle Credit
The “Qualified Plug-in Electric Drive Motor Vehicle Credit” is a federal tax credit for every new plug-in electric car you buy starting back in 2010 through the phase-out period (more on that below). The credit ranges from $2,500 to $7,500, depending on the size of the battery in the car.

While I began this article with the Tesla Model S, the credit applies to many other cars including the new BMW i3, the Nissan Leaf, the Chevy Volt and the Fiat 500e. All of the foregoing models, including the Tesla, receive the maximum credit of $7,500. For you Porsche fans, the Panamera S E Hybrid receives a $4,751.80 credit. Other popular cars with a less-than-maximum credit include the Honda Accord Plug-in Hybrid (good for a $3,626 credit) and the Toyota Prius Plug-in (good for the minimum $2,500 credit). For a complete list of the available cars and their credit amounts, please visit the IRS website here.

How and When?
The credit is taken on your income tax return for the year it was purchased. So, if you purchased the car during 2014, your credit would be taken on your 2014 income tax return prepared and filed during 2015. As a result, if you bought a plug-in electric car and are expecting a refund of tax withholding due to the credit, you may be waiting a while.

It’s Nonrefundable
The credit is a nonrefundable credit. This means that it can only reduce your tax liability and cannot be rolled over into another year. In other words, if you have a lower tax liability, the credit will be of limited use to you.

For example, if your 2013 taxable income is $100,000, then your federal tax liability would be roughly $21,500. A $7,500 nonrefundable credit would reduce this tax to $14,000 ($21,500 tax liability – $7,500 nonrefundable credit). In this situation, you would have benefited from the entire credit.

However, if your taxable income is $30,000, your federal tax would be roughly $4,000, and the same $7,500 nonrefundable credit would reduce your tax to $0. You would not receive any further benefit from the credit and the rest of the balance of it would be lost. So, if possible, plan your plug-in electric car purchase during a year that you know you’ll have enough tax liability to use the credit applicable to the car you purchase.

There’s a Phase Out
The credit is phased out for models by manufacturers that have sold 200,000 or more plug-in electric cars in the United States. Therefore, if a manufacturer has sold more than 200,000 plug-in electric cars in the United States, the credit available for purchases of new plug-in electrics by that manufacturer goes down. However, as of the date of this writing, the manufacturers are nowhere near this mark. So, you probably have a bit of time before the credit phase-out begins.

For example, the highest selling manufacturer on the list thus far is Nissan with 41,092. So you would still qualify for the full credit of a Nissan plug-in electric car without phase out. To check on quarterly sales numbers of various manufacturers, see the sales stats on the IRS website here.

The phase out period begins in the quarter following the quarter that sales reach the previously described 200,000 mark. During that time, the credit of a new plug-in electric vehicle will be 50% of the original credit amount. After 2 quarters, the credit goes down to 25% of the original credit amount. After 2 more quarters, there is no more credit.

Business Use Gets Tricky
Let’s talk if you plan to use the plug-in electric car in your business. While the credit is still available for this use, the credit becomes a part of the general business credit and the basis is reduced for the amount of the credit.

Leases Don’t Count
Leases of qualified plug-in electric cars don’t count for credit purposes. Only purchases of new qualified plug-in electric cars receive the credit.

California Clean Vehicle Rebate Project
California’s getting into the act, too. However, their incentive is in the form of a rebate, not a credit. The “California Clean Vehicle Rebate Project” will get you a rebate of up to $2,500 on most electric cars including the Tesla and many more cars. To see the list of applicable cars and to apply for the rebate, go to the California Center for Sustainable Energy website here.

Unlike the federal credit, the California rebate counts for leases.

Also unlike the federal credit, the car must be kept for at least 36 months to qualify for the credit. The rebate (or a portion of it) must be given back if the car is sold during the first 36 months of ownership.

Consider Utility and Foregone Gas Costs
I wouldn’t be a good financial planner if I didn’t tell you that the price of electric cars can command a premium over their gas-powered brethren and that you should consider this in your decision. As such, you must balance the extra initial cost of an electric car with the savings you’ll gain from the federal tax credit, the California rebate and gas.

Also, depending on the model of the car, you will have to plug it in most of the time it’s parked at home. As a result, you’ll need to have a garage space and access to an electrical outlet.

As always, you should discuss any tax-motivated purchase (if at least just to brag) with your tax advisor beforehand. Every person’s situation is different, and it is next to impossible to give blanket advice on anything tax related. That’s why we’re here! Please contact me at (805) 963-7811 or dclark@bpw.com should you have any questions.