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--hybrid electric cars and electric cars--are becoming increasingly popular. These vehicles 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. Such a 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.

Some of these credits have expired and have not been renewed. However, other credits remain in place for many types of green vehicles. Check the U.S. Department of Energy's website for updated information on green vehicle tax incentives and credits. 

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 Hybrid Electric Vehicles and Electric Vehicles

Plug-in hybrid electric vehicles (PHEVs), such as the popular Toyota Prius, are powered by both an internal combustion engine and a rechargeable battery. Electric vehicles (EVs) are powered solely by a battery.

PHEVs and EVs purchased during 2010 or later may be eligible for a tax credit of up to $7,500. The credit amount varies based on the capacity of the battery. Thus, some PHEVs and EVs qualify for larger credits than others. You can find a list of the credit amounts for various vehicles on the Department of Energy's website at www.fueleconomy.gov.

To obtain the credit, the PHEV or EV 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.

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

Hybrids, Diesels, and Alternative Fuel Vehicles

A tax credit of up to $3,400 was available for some pure hybrid cars and diesels purchased during 2005 through 2010. A credit up to $4,000 was available for alternative fuel vehicles purchased during the same time period. Alternative fuel vehicles include those fueled by compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, and any liquid that is at least 85% methanol.

Currently, there are no federal income tax credits for hybrids, diesels, or alternative fuel vehicles.

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.

by: , J.D.

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