Federal and State Tax Credits for Plug-in Hybrids and Electric Cars

Unfortunately, the tax credit for buying a hybrid car is gone. However, if you are ready to switch to a plug-in hybrid or electric car, you might be eligible for up to $7,500 in Federal and $6,000 in Colorado tax credits. This combination can reduce the cost of such models; however, there are several things to keep in mind.

Both credits can be confusing to understand, have recently changed and are very different in terms of the types of vehicles that qualify for the credit and other requirements. We will focus on qualified plug-in hybrids and electric cars only.

Not all electric vehicles and plug-ins qualify.

In order to qualify for the Federal credit, the vehicle must be a qualified vehicle (a buyer can generally rely on the manufacturer’s representation that the vehicle is eligible), comply with the legal definition of a motor vehicle as per the Clean Air Act, title II and have gross vehicle weight of less than 14,000 pounds. Moreover, the federal credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States. Be sure to check IRS website for qualified vehicles, credit amount and quarterly sales by manufacturer:

https://www.irs.gov/Businesses/Plug-In-Electric-Vehicle-Credit-IRC-30-and-IRC-30D.

In order to qualify for the Colorado credit, the vehicle must meet multiple criteria as well, including gross vehicle weight rating of 8,500 pounds or less, Colorado title and registration, maximum speed, etc. Be sure the vehicle meets all the criteria and check a list of makes and models that the department has already evaluated for credit eligibility: https://www.colorado.gov/pacific/sites/default/files/Income67.pdf. While Colorado does not cap the number of credits it awards, the credit is set to expire on January 1, 2022.

Credit amount varies.

The Federal credit depends on the size of the battery in the car. To qualify a vehicle must have a battery pack with a capacity of at least 4 kilowatt hours (kWh) and be capable of being recharged from external. Provided it meets all the other qualifications, the federal government allows a credit of $2,500, plus $417 for a vehicle that has a battery with at least 5 kWh of capacity, and then an additional $417 for each additional kWh up to $7,500.

The Colorado credit is calculated based upon the vehicle’s manufacturer’s suggested retail price or the cost of the used vehicle or the leased value of the vehicle and battery capacity or the conversion cost and an applicable percentage.

Use it or lose it?

The Federal incentive is a nonrefundable credit. While it reduces your tax liability dollar-for-dollar, it cannot reduce your tax balance beyond zero. No refunds or carry forwards are allowed. The Colorado credit is more generous and if the credit exceeds the tax due, it will be refunded.

Should you buy it new?

For the Federal credit, the vehicles must be acquired for use or lease to others and not for resale. Additionally, the original use of the vehicle must begin with you and the vehicle must be used predominantly in the United States. Therefore, you must buy a new vehicle and if you lease a vehicle, you cannot claim the credit. Do not forget that you must place the vehicle in service during the tax year to claim the credit.

On the other hand, the vehicle does not have to be new to qualify for the Colorado credit; leased vehicles may qualify as well. Used vehicles are eligible if they have never been registered in Colorado before.

As one can see, there are a lot of moving pieces. Further, special rules may apply to vehicles bought for business use, alternative fuel vehicle, etc. If you have questions regarding Federal and Colorado tax credits for plug-in hybrids and electric cars, we can run your numbers to estimate the benefit you might receive. Call us at 719-579-9090 or send us an email to info@biggskofford.com.