With gas prices finally drifting down from their recent highs of $4.00 per gallon, drivers are once again deciding whether it makes sense to replace their current gas powered automobile with a more fuel efficient vehicle. Five years ago, Hybrids were all the rage. Now, thanks in part to a $7,500 tax credit from the federal government, some US drivers are beginning to seriously look at purchasing Plug-in Electric vehicles.

According to the IRS, “For plug-in electric vehicles acquired after December 31, 2009, the credit is equal to $2,500 plus, for a vehicle which draws propulsion energy from a battery with at least 5 kilowatt hours of capacity, $417, plus an additional $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours. The total amount of the credit allowed for a vehicle is limited to $7,500.”

Currently, all seven certified vehicles meet the requirements making them eligible for the full $7,500 tax break. Below are the vehicles certified for the Qualified Plug-In Electric Drive Motor Vehicle Credit as of the end of June:

Vehicle Credit
CODA Sedan (Electric Vehicle Manufactured by CODA Automotive ? Inc.) ? 2010 $7,500
Chevrolet Volt – ? 2011 $7,500
Nissan Leaf ? 2011 $7,500
smart fortwo Electric Drive Vehicle distributed by smart USA ? Distributor LLC ? 2011 $7,500
Tesla Roadster- 2008-2011 $7,500
Think City EV (Electric Vehicle) -2011 $7,500
Wheego LiFe Electric Vehicle -2011 $7,500

Please note that there are a few additional rules applicable to this tax break. For starters, to qualify, you must purchase the car as new. Used vehicles don’t qualify. Plus, if you lease the car, the tax credit goes to the company that you leased the vehicle from, and not to you. Finally, you’re supposed to use the vehicle primarily in the US.

200K Car Limit

Like with the Hybrid Car Tax Credit, this credit will begin to phase-out on some of the more popular models. To level the playing field for each manufacturer, the allowable tax credit starts to disappear for a manufacturer once they sell 200,000 plug-in electric vehicles, as follows:

  • The full credit is allowed through the end of ???? the quarter following the quarter during which the manufacturer sells its ???? 200,000th plug-in electric vehicle.
  • The credit is cut in half for the subsequent ???? two quarters.
  • The credit is then cut to a quarter of the ???? original credit for the subsequent two quarters.
  • No credit is allowed for vehicles purchased from ???? that manufacturer thereafter.

As we discussed in our August 2006 Newsletter, the phase-out of the Hybrid Vehicle Tax Credit began once a manufacturer sold 60,000 vehicles. The popularity of the Toyota and Lexus hybrids caused the credit for their models to begin to be phased-out almost immediately. With sales of the Nissan Leaf at 1,000 vehicles, there is no reason to believe that this credit will be phased-out any time soon.

New Tax Break Won’t Lose to the AMT

Another problem with the Hybrid vehicle tax credit was that taxpayers subject to the Alternative Minimum Tax (AMT) did not receive any tax benefit. And with more and more taxpayers paying this tax each year, many Hybrid purchasers were out of luck.

The Qualified Plug-in Electric Drive Motor Vehicle Credit is not limited by the AMT, making this tax break much more valuable to individuals in a position to purchase Electric vehicles. As we wrote in our October 2010 Newsletter in an article on the AMT, all but a few of my firm’s married clients whose Adjusted Gross Income (AGI) fell between $210k and $615k were hit by the AMT.

Yes, There’s a Form for That

In case you’re wondering, yes, there is an IRS Tax form to complete in order to claim the Qualified Plug-in Electric Drive Motor Vehicle Credit. Check out Form 8936, to see the information you need to report to the IRS to claim this credit, as well as two pages of instructions.