Going Electric? Helpful Tips for Calculating Your Hybrid Tax Credit

The federal government offers hybrid tax credit incentives for some vehicles to encourage people to buy them. This tax credit could save you money.

Lance Cothern | 

Mar 16, 2022 | 5 min read

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The federal government offers a Qualified Plug-In Electric Drive Motor Vehicle Credit to incentivize people to buy certain cars. If you're considering the purchase of an electric car, this tax credit could potentially save you thousands of dollars.

You may hear this credit commonly called a hybrid tax credit, but traditional hybrid vehicles may not qualify. You don't get the credit when you buy the car, but you may qualify for it when you file your tax return.

Understanding how this works before you purchase a vehicle can help you make sure buying a qualifying car will really save you as much money as you think it might. Here's what to know, as well as insight into calculating your hybrid tax credit.

Understand Which Vehicles May Qualify for the Tax Credit

The tax credit only applies to certain types of cars with specific batteries that power electric motors. It's easy to confuse the different kinds of hybrid and electric vehicles available to purchase if you aren't familiar with the terminology.

• A hybrid vehicle does not plug in to charge. It uses a combination of gasoline and electricity generated from driving to power the car. These vehicles do not qualify for the tax credit
• A plug-in electric hybrid vehicle plugs into an electricity source to charge the car's batteries, and it uses gasoline to supplement the electricity when needed. These vehicles may qualify for the tax credit if their batteries have at least 5 kWh of capacity
• Electric vehicles do not use gas at all. Instead, they solely rely on batteries charged by plugging in the car. These vehicles may also qualify for the tax credit

The full tax credit only applies to cars made by manufacturers that have not already sold more than 200,000 qualifying vehicles in the United States. After that point, the tax credit phases out until it reaches zero.

Currently, General Motors cars acquired on or after April 1, 2020, and Tesla vehicles acquired on or after January 1, 2020, do not qualify for this tax credit. You can check the status of car manufacturers on the IRS's website.

Finding the Maximum Potential Amount of the Tax Credit

The maximum amount of the tax credit for your personal situation depends on three main factors. The first two depend on the specific vehicle you buy. As previously mentioned, your maximum tax credit amount starts to phase out after a manufacturer sells 200,000 qualifying cars in the United States.

Next, the tax credit uses the kWh capacity of the vehicle's battery to calculate the maximum potential amount. A car with a 5 kWh battery capacity starts with a $417 tax credit potential. The potential credit amount increases by $417 for each additional kWh of capacity. The maximum credit possible is $7,500. This equates to roughly a 22 kWh battery capacity.

Finally, the credit amount depends on your individual tax situation. You must have a tax liability to claim this tax credit as the IRS will not refund any excess credit.

How to Determine the Final Amount and Claim the Hybrid Tax Credit

You do not get the tax credit when you purchase a qualifying car. Instead, you have to claim the tax credit on your tax return by using Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit. If you use a tax preparer or tax preparation software to complete your tax return, the software or tax preparer should do this for you.

If the vehicle you buy qualifies for a full $7,500 credit and you have $10,000 of tax due after accounting for other tax credits, you can claim the whole $7,500. If you only have $5,000 of tax due after accounting for other tax credits, you will only receive $5,000 of the tax credit. The rest expires, and you cannot apply it to future tax returns.

It's important to note that your tax owed is based on your taxable income. This is calculated before any estimated tax payments you have made or any withholdings you've had from your paycheck are applied. It is possible to get these amounts refunded to you, just not the credit itself.

So, Does the Tax Credit Actually Save You Money?

You may save money if you already plan to purchase the specific car and qualify for the tax credit. However, you may not save money if you end up spending more to buy a plug-in electric hybrid vehicle than you would an alternative car.

For example, starting price for a 2022 Toyota RAV4 Prime, the plug-in hybrid version, is about $41,000. The RAV4 Prime qualifies for the full $7,500 tax credit resulting in a $33,500 final cost after the credit, assuming you qualify. The alternative option may have been a 2022 Toyota RAV4 Hybrid, which starts around $30,000, or a traditional gasoline-only RAV4, which starts around $27,500. In either case, you'd spend $3,500 over the Hybrid, or $6,000 more than the non-electrified RAV4 after accounting for the tax credit. Comparing annual operating cost of all three RAV4 models, with the standard numbers from fueleconomy.gov produces some interesting results:

An average driver, according to fueleconomy.gov, would need to drive the RAV4 Prime for 8-10 years to make up the difference in initial price over a RAV4 Hybrid or regular RAV4. That's a long time to keep a car, but it's only one specific example.

You'll want to consider your unique situation, how you plan to use it, how long you plan to keep it, and your needs when purchasing your next vehicle. Make sure you've found the right car for you before moving forward with a plug-in hybrid vehicle purchase.

Lance Cothern

I started reading everything I could about personal finance while I attended college. It turns out that was one of the smartest decisions I could have made. Now, I want to share that knowledge with you. Using what I've learned through my education and experience, I aim to help you make informed decisions throughout the car buying and lending process while saving money at the same time.