EV Tax Credits: Tesla, GM Phasing Out

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The federal tax credit for Tesla’s EVs falls to $1,875 for its final six months, victim of the incentive law’s phase-out rule.

Meantime, GM’s tax credit, which dropped to $3,750 from $7,500 in April, has three months more to run at that level. It will be halved again to $1,875 on Oct. 1 for its final six months.

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The diminishing credits could put GM and Tesla at a disadvantage versus other plug-in vehicle makers whose cars still qualify for the full credit.

Present rules for the federal income tax credit for plug-in vehicles start phasing the incentive out, on a manufacturer-by-manufacturer basis, once a carmaker has sold 200,000 qualified vehicles.

EV tax credits

Unintended Consequence

The rule – passed and signed into law in 2008 during George W. Bush’s administration – was designed in part to appease anti-incentive forces in Congress by capping the potential loss of tax income.

It has had the unintended effect, however, of penalizing companies that pioneered mass production plug-in vehicles and have been the most successful in marketing their battery-electric and plug-in hybrid cars.

Automakers that haven’t sold very many of their plug-in vehicles maintain a competitive advantage by qualifying for full tax credit benefits while thodse at the forefront of PEV development lose theirs.

Tesla was the first to hit the 200,000 sales mark, followed by General Motors. Nissan is expected to hit the ceiling in 2021 and no one else is close.

Nissan introduced the the first modern mass-market EV, the Leaf, at the end of 2010. GM introduced the Volt plug-in hybrid at almost the same time.Tesla began selling its Model S EV in mid-2012.

There is an EV tax credits extension bill in Congress to boost the ceiling to 600,000 qualified vehicles per manufacturer and to restore the credit for fuel-cell electric vehicles, which expired at the end of 2017.

On the other side, oil interests have mounted an intensive lobbying campaign to kill the incentive.

Most pundits think neither effort will succeed, given the divided Congress with which we’re presently saddled.

How It Works

As the rules stand today, the first registered owner of a qualified EV or plug-in hybrid can get a federal income tax credit for the year in which the purchase was made.

The amount is capped at $7,500 but varies based on battery size. For new plug-in hybrids, it now runs from around $4,000 up to the full $7,500. All fully electric four-wheel vehicles qualify for $7,500 maximum credit.

EV tax credits can be used to offset a taxpayer’s federal income tax bill up to the full amount of the credit.

So if you owe Uncle Sam $8,000 and bought a car with a $7,500 credit, you’d either write a check for $500 or get a $7,500 refund – depending on whether you pre-pay taxes through withholding or make quarterly installments. If your tax bill after all other deductions and adjustments comes to $4,500, then that’s all the credit you could claim.

For leases, EV tax credits goes to the leasing company that owns the vehicle, but it typically is applied by the leasing company to to help reduce monthly lease payments. There is no requirement, however, that a leasing company pass on the full amount of the the credit.

The full credit is good until three months after a manufacturer’s sales of qualified vehicles hits the 200,000 mark. After that, it is cut in half for six months and then cut in half again for six months more. It disappears at the end of the 15-month phase-out period.