How Do Electric Vehicle Tax Credits Work?

The forthcoming passage of the Inflation Reduction Act is set to alter the federal government's EV tax credit scheme. We'll update this piece once more details are available.

Beginning in 2010, the federal government implemented a program that offers up to $7500 in tax credits to purchasers of. The purpose of the program is to incentivize people to buy more fuel-efficient vehicles by bringing the price of EVs down closer to that of internal combustion vehicles. Some states also jumped in with additional tax credits of their own.

Though some automakers' EVs have already been phased out of the federal program—tax credits decrease based on that company's total EV sales from 2010 on—many vehicles still qualify. Here's your quick guide to tax credits: what they are, how they work, and how they can benefit you.EV tax credits are nonrefundable tax credits that come from buying a vehicle with a battery propulsion system that can draw power from an external power source.

The amount of credits, or tax incentives, that any car can qualify for depends on the size of the battery in the car. Every car that qualifies starts with a base incentive of $2500, and then for every 5 kWh of battery capacity, the vehicle qualifies for another $417 of credits. Vehicles can qualify for up to $7500 of tax credits.

That said, once an automaker sells a total of 200,000 units that qualify for the rebate—it can be a mix of models—a phase-out begins. The available tax credit is reduced by 50 percent for two quarters and then 25 percent for the subsequent two quarters. At that point, the vehicles made by the automaker no longer qualify.

Teslas and GMs could get credits again.

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