Electric car tax credits are the hot new collectible of the 21st century. But, before claiming one, it’s vital to understand their basic functionalities.

### A Brief Overview of the Current EV Tax Credit

On October 3, 2008, then-president George Bush signed H.R. 1424 into law. After his signing, it became Public Law 110-343, which included the Energy Improvement and Extension Act of 2008. In this act, a \$7,500 tax credit was made available for new EVs sold with a battery pack of at least 16kWh and a weight of under 8,500 lbs. For plug-in hybrids, like the Chevrolet Volt, included were a base \$2,500 credit and an additional \$417 per kilowatt-hour above 4kWh. Once the sum of the additional battery capacity above 4kWh and the base \$2,500 amounted to \$7,500, no more credit would be allotted.

This pricing technique is why some PHEVs have very strange tax credit amounts. For instance, a 2022 BMW 745e xDrive only gets a \$5,836 credit due to its battery capacity. Since its battery is 12kWh, buyers will get the base \$2,500 credit plus \$417 for the 8 additional kilowatt hours above the base 4, yielding a total of \$5,836. If you’re unsure how much of a tax credit your PHEV could get, visit the U.S. DOE site or use this simple equation below. Just remember that if the amount you calculate is above \$7,500, you’ll just have to round back down to \$7,500.

Tax Credit Amount = (\$417 x (Total Capacity kWh - 4kWh)) + \$2,500

For the federal credit, a manufacturer will have its credit value halved once 200,000 electric vehicles are sold. Once an OEM sells 400,000 EVs, the credit will be halved again. At 600,000 units unloaded, the credit will be extinguished entirely. For example, once an automaker sells its 200,000th EV, its \$7,500 maximum credit will drop to \$3,750, and then to \$1,875 at 400,000 units.

Everything above is on the federal level, affecting residents of all 50 states. Moreover, since this is for federal taxes, you’ll have to owe the government at least the amount you’ll deduct to reap its maximum benefits. The tax credits do not carry over to the following year, so if you receive a \$7,500 credit on your new 2022 Leaf, but only owe \$5,000, it’ll deduct just \$5,000, rendering the other \$2,500 useless.

Certain states offer tax credits and rebates too. Unlike the federally-appointed credits, these credits can vary immensely based on what state you live in. 31 of the 50 states offer no incentives, but some, like Colorado, offer upwards of \$5,000 per electric vehicle. State credits affect your state taxes, so they’ll add to the applicable federal credits. For instance, in Colorado, you can yield a maximum of \$12,500 off your taxes for purchasing a new electric car.

Finally, but still worth emphasizing, the IRS will subtract an additional 30% of the cost required to install a home charging station, covering up to \$1,000. This addition will phase out by December 31, 2021, so it’s vital to act soon if you plan to install a home charging station this year.

### How is Build Back Better different?

In Build Back Better, the concept of a financial incentive for purchasing EVs remains, but there are a few key differences. The first and possibly most notable aspect of Build Back Better is that the tax credits are refundable, meaning that if your credit is worth more than the amount you owe in taxes, then you would receive a check for the remaining amount. The second aspect of Build Back Better is that the allowances have increased for certain vehicles, but also decreased for others, especially for plug-in hybrids. The last, and most controversial area, is the additional \$4,500 bonus allotted to buyers of unionized EV manufacturers.

### Build Back Better Structure

Unlike the current EV tax credit, Build Back Better does not offer a base \$7,500 credit for pure electrics. Instead, it provides a \$4,000 credit, and an additional \$3,500 if the battery pack exceeds 40kWh. If the car was made with at least 50% American components and U.S. battery packs, an additional \$500 would be added to your credit. Moreover, if the vehicle was made by a unionized automaker, like GM or Ford, the IRS would append \$4,500 more. Finally, range extenders are permitted if the fuel tank is less than 2.5 gallons.

Suppose your EV was constructed with United States-based components, included a battery of over 40kWh, and built by a unionized OEM. In that case, you could claim up to \$12,500 as a refundable credit.

Everything mentioned above will run on a ten-year timeline, with the first five years including every EV, and the last five only for U.S.-made electrics.

Another feature of Build Back Better is the income and vehicle price caps. If an individual makes more than \$250,000 a year, he or she will not be able to claim a credit. Furthermore, joint filers making more than \$500,000 won’t be able to claim the credit either.

As for the vehicle price caps, an electric sedan priced above \$55,000 isn’t applicable for the credit. SUVs, vans, and trucks above \$80,000 cannot qualify either.

### Will it pass?

Build Back Better has passed the House of Representatives, but now it’s on to the Senate. While there is a strong likelihood that the EV portion will pass, the unionization plans are subject to criticism by both the Republicans and some moderate Democrats. In a recent interview with Automotive News, Senator Joe Manchin (D - West Virginia) said, “We shouldn’t use tax dollars to pick winners and losers.” Manchin went on to say, “You let the product speak for itself."

Interestingly, only one automaker will be able to see the benefits of the unionization portion passing immediately, and that’s GM, provided it resumes Bolt EV and Bolt EUV production in January.

### FAQs

Why can’t I get a federal tax credit on a Tesla or GM product now?

GM and Tesla have each sold over 600,000 vehicles that qualified for the federal tax credit, thus utilizing it entirely.

How does an electric vehicle tax credit work?

Currently, the EV tax credit is a nonrefundable credit applied to your federal taxes.

Can I get one on a plug-in hybrid?

Yes, all plug-in hybrids offer a base \$2,500 credit, plus \$417 per kWh above 4kWh, allowing for a maximum of \$7,500.

What are the proposed changes in the Build Back Better bill?

Build Back Better will offer a refundable tax credit, additional money allocated to unionized automakers, and a limit to a 2.5-gallon fuel tank on plug-in hybrids.

Will the Build Back Better additions be retroactive?

Build Back Better’s EV credits will not be retroactive. Rather, they’ll commence after December 31, 2021, or whenever it gets passed.