Accelerating The Plug-in Electric Vehicle Tax Credit In The US
Even though the Qualifying New Plug-in Electric Vehicle Tax Credit (the ‘EV Credit’) can’t be claimed on a tax return until the year after an electric vehicle is purchased, some buyers of qualifying vehicles may still be able to get the benefit of the credit this year and even use the EV credit to help them purchase a new electric vehicle.
Find out how to increase cash flow by amending IRS Form W-4 to account for the EV Credit, and in some cases effectively lower or completely erase car payments for the rest of the year.
Congress enacted the EV Credit to make electric vehicles cost competitive with comparable conventional vehicles. The credit is only available to purchasers of new electric vehicles and it ranges from $2,500 to $7,500 depending on the vehicle’s battery size. Examples of 2015 models that qualify for the credit are shown below with a complete listing available on the IRS website.
Confirm Tax Liability to Claim the Tax Credit
Taxpayers shouldn’t assume they will be able to claim the entire EV Credit on their tax return. Taxpayers can only claim the credit to the extent of their income tax liability for the year of purchase. If a purchaser’s tax liability falls below the available EV Credit amount for that year, any excess unused credit amount may be permanently lost.
Many taxpayers can use the IRS on-line Withholding Calculator to estimate whether they will have enough tax liability to claim the EV Credit in a given year. Taxpayers with sufficient tax liability can claim the credit on Form 8936 attached it to their U.S. income tax return.
Taxpayers who plan to purchase a new qualifying EV and claim the EV Credit on their tax return may be able to use their anticipated credit to increase their cash flow in the year of purchase. If the taxpayer earns salary or wage income and has not inflated the number of withholding allowances claimed on IRS Form W-4, claiming additional W-4 allowances can increase take-home pay and make extra cash available for car payments for the remainder of the year.
The Matching Principle
The IRS encourages taxpayers to make this W-4 adjustment to ensure that tax withholding corresponds to anticipated tax liability. Absent any adjustment most taxpayers claiming the EV Credit on their tax return can wind up having taxes over-withheld by their employer. By converting their EV Credit into additional withholding allowances on their W-4, those taxpayers bring their tax withholding and tax liability into balance.
Finding the Optimal Number of Withholding Allowances
Most taxpayers can use the IRS on-line Withholding Calculator to determine how many additional W-4 allowances are necessary to make tax withholding match tax liability for the year. With this IRS tool, taxpayers simply submit financial and tax information, specify the amount of the EV Credit they plan to claim, and the Calculator will tell them how many allowances are needed on an amended W-4 to ensure the credit does not result in over-withheld taxes.
Calculating the New Tax Withholding Amount
Taxpayers can also use IRS Publication 505 to calculate the optimal number of withholding although this approach takes a little more work. Publication 505 provides tables and worksheets taxpayers can use to convert their EV Credits into the appropriate number of withholding allowances based on the taxpayer’s filing status.
Most employers allow employees to amend their W-4 withholding allowances electronically. Otherwise, taxpayers can amend their W-4 by visiting the IRS website, downloading a current version of the form, and submitting the completed form to their employer. Employers that receive an amended W-4 must put the new withholding allowances into effect no later than the first payroll period that begins after a 30 day grace period.
Re-Adjustments May Be Required
Taxpayers who adjust their W-4 to claim the EV Credit should remember to re-adjust their W-4 at the end of the tax year or if, at any point during the year their personal or financial situation changes in a way that could impact their tax liability (e.g., job loss, marriage, new job, etc.). Otherwise, a taxpayer could inadvertently under-withhold taxes and could even trigger penalties if the under-withholding is less than 90% of the tax due for the year.
Available State Incentives
In additional to the EV Credit, purchasers should also investigate whether any other federal, state and local incentives are available for the purchase or lease of an electric vehicle or an electric vehicle charger. Regional, local and utility rebates may also be available as well as other incentives such as single-driver access to high occupancy vehicle lanes and toll rate reductions.
When added to the federal income tax credit the total package of available incentives can make a compelling case to buy a new electric vehicle.
Editor’s Note: Our thanks to Mr. Brents for his extensive knowledge of the federal tax credit . Barry is a tax attorney in the Bay Area. He also maintains the website – PlugIncentives.com, where he tracks incentives around the country for light-duty electric vehicles and EV charging stations.