Tax credits on electric vehicles aren’t new. This program started back in 2008-2009 and has helped thousands of drivers, maybe more, buy an electrified vehicle knowing that they’d get a bit of money back within the following year. The best EV tax credits in 2022 offer consumers up to $7,500 in credits—and that number may go up to a whopping $12,500.
But are EV tax credits helping all electric-car shoppers equally? It does not seem likely. See why federal electric vehicle tax credits, which were meant to help shoppers make the switch, may only be helping those who don’t even need them.
Are electric vehicles 100% tax-deductible?
Unfortunately, no. EVs and partial-electric cars like the Tesla Model 3, Volvo S60 PHEV, Chrysler Pacifica Plug-in Hybrid, Ford Escape Plug-in Hybrid, and Ford Mustang Mach-E all qualify for EV tax credits (which are different from deductions). However, you can’t write off a new electric car on your taxes unless you have other qualifying reasons.
For instance, if the EV is a business expense, you may be able to deduct those costs from your taxes. We recommend consulting an accountant or tax specialist for specific details on deducting electric vehicle costs.
Do EV tax credits lower the price of the electric car you want to buy?
No, while a lot of the marketing will make it seem like a $7,500 EV tax rebate lowers the price of a $50,000 electric car to $42,500, that’s not how it works. Only local, state, or federal rebates give you cold, hard (digital) cash, but even that doesn’t lower the vehicle’s initial purchase price.
This federal EV incentive is just a tax credit, and you may not even qualify for the full amount. Grist reported last year on a buyer who brought home a Nissan Leaf, which was eligible for a $7,500 tax credit. However, the credit is only for as much as you owe or have paid—and the buyer only owed $3,829.
Wealthy drivers often benefit more from EV incentives
Grist explains that “car buyers also have to make at least $66,000 a year — and have no other significant credits — to owe enough in taxes to get the full benefit” when buying an electric vehicle or PHEV. That means that buyers who are truly getting the full EV tax benefit are likely making even more than $66K/year.
Grist goes on to report that “78 percent of the [EV tax credits] were claimed by people making at least $100,000 per year; 7 percent were claimed by people making at least $1 million a year.” This is according to an analysis by the Congressional Research Service.
More expensive EVs often offer bigger EV tax credits
EV tax credits may also be rewarding wealthier buyers more than middle-class buyers because all-electric cars and EVs with the biggest batteries tend to offer the most credit. However, those are the same cars that tend to be the most expensive.
And the most affordable non-plug-in hybrids, which can do their part in reducing gasoline consumption? They don’t qualify at all.
Some automakers have hit their cap or will soon
Did you know that there’s a cap on how many vehicles an automaker can sell that will qualify for the EV tax credit? It’s true—an automaker can only sell 200,000 electrified vehicles (all-electric or plug-in hybrid electric) before it hits its cap. The government offers a phase-out where, in six-month increments, vehicles can qualify for smaller and smaller tax credit amounts.
For example, Tesla EVs are no longer eligible because the company hit its cap in 2018, partly because of its popularity and because all of its vehicles are electrified. While Tesla isn’t exactly known for affordability, its cheapest Model 3 cars were gateway EVs for buyers.
Though Toyota is an incredibly popular brand (the Camry alone has sold over 60,000 units in just the first quarter of this year), not that many of its vehicles qualify for the tax credit. Toyota is nearing its EV federal tax credit limit however, and soon, electrified Toyotas won’t be eligible for these incentives. That will remove an additional pool of affordable EVs.
EV tax credits may not be enough to tempt middle-class buyers
According to one study, only 17% of EV buyers said that the EV tax credit convinced them to buy their cars—the remaining 83% claimed that they would have bought the vehicle with or without the credit.
Budget-minded buyers who can’t afford a new car payment on an EV may consider leasing instead. The dealership gets to claim the federal tax credit, which usually means a lower leasing price and lower monthly payments for you.
This isn’t an easy issue to fix. Removing the tax credit and incentives isn’t the answer—but, at the moment, the tax credits only seem to be helping the rich stay rich.