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Electric Car Buyers Need To Add This to Their Shopping Lists: Tax Credits

Besides beating the high cost of gas, one of the perks of owning an electric vehicle in the U.S. is the federal electric car tax credit of up to $7,500. However, this incentive has a catch. Once a manufacturer has sold more than 200,000 plug-in vehicles (it applies to both EVs and plug-in hybrids), that tax credit begins to phase out.
Two manufacturers, Tesla and General Motors have hit that milestone and their vehicles are no longer eligible for the credit. Another manufacturer, Toyota, is expected to pass this threshold by June 1. Even if its sales go above that level, all electric or plug-in vehicles sold in that quarter will still be eligible for the credits. The phase-out then starts dropping in half for the following six months, and then half-again for the next six months before termination.

While the credit is geared to promote EV sales, both GM and Toyota used up the bulk of their credits by selling plug-in hybrids. In the case of GM, it sold more than 150,000 of the Chevy Volt, while Toyota already has sold more than 190,000 of its Prius Prime and RAV4 Prime plug-ins.

The government’s formula for determining the tax credit starts with a base of $2,500 for any vehicle that has plug-in capability plus $417 for a 5-kWh battery pack. For each kWh above that level, add an additional $417 until the $7,500 cap is achieved. In the case of the Prius Prime with its 8.8 kWh battery, it’s eligible for a $4,502 credit, while the RAV4 Prime, with its 18.1 kWh pack, gets the full $7,500, at least for now.

As a result of the phase-out, buyers of the soon-to-be launched all-electric 2023 bZ4x, which starts at $42,000, will find that they might not be getting the full $7,500 tax credit, while the nearly identical 2023 Subaru Solterra will. Subaru does sell a Crosstrek plug-in hybrid, but its lackluster sales are nowhere near the 200,000-unit threshold. As a result, Solterra will enjoy a significant tax advantage over Toyota as the latter phases out the credit.

This also is an indication of another variable EV (and plug-in hybrid) buyers will have to consider when shopping for a new vehicle. Often that credit plays a large factor in bringing EV prices in line with gasoline-powered rivals. A case in point in the 2022 Hyundai Kona, which is offered with gasoline or electric powertrains. The base price of a Kona SEL with a gas engine is $23,100, while an SEL electric starts at $34,000. In addition to the $7,500 tax credit, local incentives, like the $2,750 in clean vehicle rebates from the state, brings parity to the final out-of-pocket costs.

However, keep in mind that both the tax credits and rebates come post-sale, so buyers must front up or finance the entire amount of the purchase.

As more plug-in hybrids and electric models come to market and are sold, the number of companies eligible for tax credits will dwindle. In the case of Hyundai, the new Ioniq 5, Ioniq Plug-in Hybrid as well as PHEV versions of the Tucson and Santa Fe all are eligible for the credits. Hyundai soon may find itself in the same position as Toyota in phasing out the perk.

Ironically, Nissan, which only sells the electric LEAF, is still below the 200,000-unit threshold having sold 165,000 since the vehicle’s introduction in 2010. It doesn’t offer a PHEV eligible for the tax credit and plans to launch its second electric, the Ariya later this year.

Attempts to extend the credits have been stymied by the Biden Administration’s proposal to limit them to EVs and PHEVs produced by manufacturers with union labor. As a result, there are no changes or extension of the credits on the horizon and it’s likely more makers will soon be running out of credits.


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