Energy efficient vehicles are becoming increasingly popular, and it’s not hard to see why. Driving an energy efficient vehicle can save you hundreds of dollars on gas, reduce your carbon footprint, and protect the environment. Purchasing this type of vehicle may also make you eligible for an energy efficient vehicle tax credit, which could significantly reduce the amount of income tax you owe.
There are two different energy efficient vehicle tax credits:
- Qualified Plug-In Electric Drive Motor Vehicle Credit
- Alternative Motor Vehicle Credit
Here’s what you need to know about each of these credits before filing your income taxes this year:
What is the Qualified Plug-In Electric Drive Motor Vehicle Credit?
Two of the most common types of energy efficient vehicles are electric vehicles and plug-in hybrids. These vehicles typically cost more than gas-powered vehicles. But the Qualified Plug-In Electric Drive Motor Vehicle credit could make purchasing an electric or plug-in hybrid more affordable.
What Are the Eligibility Requirements For the Qualified Plug-In Electric Drive Motor Vehicle Credit?
If you recently purchased an electric or plug-in hybrid vehicle, you may be eligible for this tax credit. However, there are other eligibility requirements you must meet in order to qualify, including:
- The vehicle must weigh less than 14,000 pounds.
- The vehicle must be designed with a battery pack that has a capacity of at least 5 kilowatt-hours.
- The vehicle must be 100% electric or a plug-in hybrid. Hybrid vehicles that do not need to be plugged in to recharge do not qualify for this credit.
- The vehicle must have been new when it was purchased.
The type of electric or plug-in hybrid vehicle you purchased could also impact your eligibility. The credit will no longer apply once an automotive manufacturer has sold 200,000 qualifying vehicles.
For example, Tesla has already sold over 200,000 qualifying electric vehicles. Because the company has reached this milestone, you will not qualify for this tax credit if you purchase a Tesla electric vehicle.
You can see the full list of vehicles that currently qualify for this tax credit on the Internal Revenue Service (IRS) website.
What is the Value of the Qualified Plug-In Electric Drive Motor Vehicle Credit?
The Qualified Plug-In Electric Drive Motor Vehicle credit is worth between $2,500 to $7,500. The price of the vehicle will not impact the value of your tax credit. The amount you receive will depend on several other factors, including:
- Vehicle’s battery capacity: The larger the capacity of your vehicle’s battery, the higher your tax credit will be. Batteries in electric vehicles typically have larger capacities than batteries in plug-in hybrid vehicles. This means you will typically qualify for a higher credit if you purchase an electric vehicle instead of a plug-in hybrid.
- Your tax liability: Your credit is limited by your current tax liability. For example, if your federal tax liability is $2,000, you cannot claim a $2,500 credit. In this case, the maximum amount you will be able to claim for this credit is $2,000. Don’t confuse your federal tax liability with the amount you owe the IRS on April 15th, though. Your federal tax liability includes both the amount you owe on this date in addition to the amount withheld from your paychecks over the course of a year.
- Type of electric or plug-in hybrid vehicle: The credit will start to phase out once a manufacturer has sold 200,000 qualifying vehicles. If you purchase a vehicle within the first two quarters after the phase out begins, you will only qualify for 50% of the credit. If the purchase occurs in the second two quarters, you will only qualify for 25% of the credit. Eventually, the credit will be completely phased out for manufacturers that meet this sales quota. You will not qualify for the credit at all once the phase out period is over.
You can see a full list of eligible electric and plug-in hybrid vehicles in addition to the credit each vehicle qualifies for on the IRS website.
What is the Alternative Motor Vehicle Credit?
The second energy efficient vehicle tax credit is the Alternative Motor Vehicle Credit, which is a tax credit that is available to taxpayers who have recently purchased an alternative fuel vehicle.
What Are the Eligibility Requirements For the Alternative Motor Vehicle Credit?
You must meet certain eligibility requirements in order to qualify for the Alternative Motor Vehicle credit, including:
- The vehicle must have been new at the time it was purchased.
- The vehicle must be used for your own personal or business use. It cannot be purchased for the sole purpose of reselling it.
- The vehicle must meet the IRS’s definition of an “alternative fuel vehicle.”
The only type of vehicle that is considered an alternative fuel vehicle by the IRS is a fuel cell vehicle. According to the IRS, a fuel cell vehicle is one that is “propelled by power derived from one or more cells that convert chemical energy directly into electricity by combining oxygen with hydrogen fuel, and that meets certain additional requirements.”
The IRS may also require that the manufacturer certify that the vehicle meets certain requirements before it officially qualifies for this type of tax credit.
What is the Value of the Alternative Motor Vehicle Credit?
The Alternative Motor Vehicle Credit is worth anywhere from $400 to $4,000. A number of factors could impact the value of your tax credit, including your tax liability. But the type of vehicle you purchased is the main factor that will determine how much you are entitled to for this credit.
The IRS uses a complex formula to determine the credit amount for each type of vehicle. Instead of doing the math yourself, it’s best to contact the manufacturer of the vehicle for more information.
The manufacturer can provide you with a written certification that states the value of your tax credit. Provide your accountant with a copy of this written certification to ensure you receive the full tax credit you deserve for purchasing an alternative fuel vehicle.
Similar to the other energy efficient vehicle tax credit, the Alternative Motor Vehicle Credit will start to phase out once a manufacturer has reached a certain sales quota. For this credit, the sales quota is 60,000 qualifying vehicles. This means a vehicle may not qualify for the full amount—or anything at all—if the manufacturer has already sold over 60,000 units.
Are State Tax Credits Available for Energy Efficient Vehicles?
The Qualified Plug-In Electric Drive Motor Vehicle Credit and Alternative Motor Vehicle Credit are the only two energy efficient vehicle tax credits available at the federal level. However, you may also qualify for an energy efficient vehicle state tax credit depending on where you live.
For example, Colorado residents who purchase a qualifying electric or plug-in hybrid vehicle or truck may qualify for a state tax credit of up to $5,000. The amount you receive will depend on the date the vehicle was purchased and the weight classification of the vehicle.
If you live in the state of Colorado, this means you could technically qualify for both a $5,000 state tax credit and $7,500 federal tax credit for purchasing an electric or plug-in hybrid vehicle.
If you have recently purchased an electric, plug-in hybrid, or alternative fuel vehicle, make sure you discuss state and federal energy efficient vehicle tax credits with your accountant to determine whether or not you qualify.