Tax Credits for Purchasing Green Vehicles

Not every green vehicle qualifies for a tax credit. Make sure you understand whether the vehicle you wish to purchase qualifies.

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Green vehicles—those propelled at least partly by means other than an internal combustion engine--tend to be more expensive than old-fashioned internal combustion engine cars. Thus, for years, a federal tax credit has been available to encourage people to buy them. This credit can greatly reduce the cost of buying a green vehicle. For example, if you purchase a green vehicle that qualifies for a $7,500 tax credit, you'll save $7,500 on your taxes (provided that you owe at least that much in tax).

Some of these credits have expired or been exhausted and have not been renewed. However, other credits remain in place for many types of green vehicles.

Which Vehicles Qualify for a Tax Credit

Not every green vehicle qualifies for a tax credit. Make sure you understand whether the vehicle you wish to purchase qualifies.

Plug-In Electric Drive Vehicles

Plug-in electric drive vehicles include both: (1) all-electric vehicles powered completely by a rechargeable battery, such as the Tesla electric cars,  and (2) plug-in hybrid cars, such as the popular Toyota Prius, that are powered by both an internal combustion engine and a battery. These vehicles purchased during 2010 or later may be eligible for a tax credit ranging from $2,500 to $7,500, depending on the capacity of the battery. You can find a list of the credit amounts for various vehicles at www.fueleconomy.gov.

To obtain the credit, the vehicle you buy must be on the IRS’s certified list of vehicles that qualify for the credit. You can find an updated list at www.fueleconomy.gov. However, you can usually rely on the manufacturer's or distributor's certification to the IRS that a vehicle qualifies for the credit.

To complicate matters, these credits are phased out once 200,000 of each model are produced by the manufacturer, counted from January 1, 2010. The phase-out starts during the second calendar quarter after the 200,000 mark is reached. The IRS announces when a manufacturer exceeds this production figure and will announce the subsequent phase-out schedule. Be sure to check these reports before you buy plug-in electric vehicle; otherwise, you could be disappointed to discover you’ll get no tax credit. You can check atwww.fueleconomy.gov.

Electric Plug-in Motorcycles

A credit is also available for two and three-wheeled electric plug-in motorcycles purchased in 2015 and 2016. The credit is equal to the lesser of 10% of the cost of the motorcycle or $2,500. Only motorcycles capable of achieving speeds of at least 45 miles per hour qualify. This credit is available only for highway-capable plug-in motorcycles and three-wheeled vehicles. Golf carts and other low-speed vehicles cannot qualify for the credit.

Fuel Cell Vehicles

Fuel cell vehicles are propelled by chemically combining oxygen with hydrogen and creating electricity. A credit is available for such vehicles purchased during 2015 and 2016. The base credit is $4,000 for vehicles weighing up to 8,500 pounds. The base credit may be increased by $1,000 to $4,000 depending on the vehicle’s fuel economy. Heavier vehicles can get up to a $40,000 credit, depending on their weight.

How to Claim the Credit

A green vehicle tax credit is available only for new qualifying vehicles you purchase or lease, not for used vehicles. In addition, the vehicle must be used mostly in the United States.

Claiming a green vehicle credit is easy. If you acquired the vehicle for personal use, fill out IRS Form 8936.

For vehicles acquired for personal use, report the credit on IRS Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit, and attach it to your return. You then list the amount of the credit on the first page of your Form 1040 and deduct it from your taxes due.

If the vehicle is purchased for business use, the credit for the business use of an electric vehicle is reported on Form 3800, General Business Credit.

However, the credit for purchasing a fuel cell vehicle is claimed on IRS Form 8910, Alternative Motor Vehicle Credit.

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