Tax Credits for Green Vehicles
This month the first cars to be fully powered by electricity were released by many of the major auto makers. The new fully electrical vehicles, the Chevy Volt and Nissan Leaf, have no drivetrain and no combustion engine. They are leading the way for the new green revolution in the auto industry.
Uncle Sam has promised big tax credits of up to $7,500 for those who purchase any of the new electric models. This is an attempt to increase consumer interest in green technology. At the moment consumers are concerned about battery life and whether the infrastructure is in place to support an electric vehicle. But these big tax breaks may be just enough to make you take a second look.
If you are thinking about buying a green vehicle, here is what you need to know.
How much is the credit:
This credit is up to $7,500. A credit is worth more than a deduction; how so? A deduction reduces your taxable income, so the value depends on your tax bracket. If you are in the 25% tax bracket, a $7,500 deduction is worth $1,875 ($7,500 * .25). A credit is a dollar for dollar reduction of your tax liability. A $7,500 credit lowers your tax bill by the full $7,500, no matter what tax bracket you are in…with a few exceptions yet to come (read on).
If you want to maximize the credit, you need to do the math. The credit starts at $2,500 for a vehicle with a battery capacity of 4 kilowatt hours (kWh). An additional $417 for each kWh of battery capacity in excess of 5-kWh is available until you reach a maximum of $7,500. So a vehicle with at least 16 kWh should get you to the full $7,500.
Example: The Chevy Volt is advertised as having a battery capacity of 16 kWh. Thus, it is eligible for a credit of $2,500 (for the first 4 kWh) plus $417 (for the 5th kWh), plus $417 times 11 kWh (16 – 5 kWh), for a total of $7,504. Credit is limited to $7,500.
Which models are eligible?
The 2011 Nissan Leaf (pictured below)has a rated battery capacity of 24 kWh and the upcoming Ford Focus Electric is at 23 kWh.
A car like the Chevy Volt (also pictured below) still qualifies even though it uses both a plug-in electric engine and a gasoline engine. That’s because the requirements for a new qualified plug-in electric car are that it be powered “to a significant extent” by an electric motor drawing power from a battery with a capacity of at least four kWh that can be recharged from an external source of electricity.
Other vehicles that appear to qualify for at least a partial credit include a version of the Escape SUV that Ford plans to offer starting next year. The Escape will be powered by an externally rechargeable 10 kWh battery pack and a four-cylinder gasoline engine.
There may be others...here are a couple of websites that you might find useful as you starting looking into which vehicles qualify. Click here for a list of plug-in motor vehicles and credit amounts for which the IRS has acknowledged eligibility. You can also click here for an independent source of information for comparing specs and features.
How long is the tax credit available?
The tax credit is not tied to a date but rather a production phase out. The full amount of the credit reduces for a specific vehicle after the manufacturer has sold at least 200,000 vehicles. But don’t let this scare you. As of March 31, 2011 cumulative sales of the Chevy Volt for instance are only 922.
Other Considerations
Just because you buy a vehicle that qualifies for the $7,500 tax credit doesn’t necessarily mean you qualify to take it. What do I mean by that?
First, you cannot use this tax credit to reduce your tax liability below zero because the credit is non-refundable. If all your other deductions and credits get you to the point where you pay no tax, you have essentially wasted the credit because you cannot benefit from it. You are not entitled to a refund and cannot carry the benefit forward.
Second, if you are one of the $30 million taxpayers subject to Alternative Minimum Tax (AMT) keep in mind the tax credit cannot be used to offset that tax.
Bottom line: Before you seal the deal consult with your CPA on your specific tax situation to avoid possibly wasting the tax credit. There is not much you can do after the fact.
So is $7,500 enough to make you want to buy an electric vehicle? I would love to hear from you in the comments section or contact me to make an appointment.
