Tax Benefits of Buying a Plug-In Hybrid Vehicle

There are quite a few benefits to owning a plug-in hybrid electric vehicle, also know as a PHEV. For one, while you may pay a greater upfront cost, you’re guaranteeing yourself much better mileage for your buck, and as a result, a good return on your money down the line. For another thing, by opting for a vehicle that puts out less emissions, you’re doing your part to help the environment. But, there’s a lesser-known benefit to buying a plug-in: the tax benefits. Here’s what you need to know about plug-in vehicles and the tax benefits that go along with them.

Federal Tax Credits

In terms of federal tax incentives for your PHEV, you’re looking at up to $7500 in tax credits. A tax credit is quite different from a tax deductible, which you may be more familiar with. Rather than a tax deductible, which lowers the amount of money you’re required to pay tax on, a tax credit lowers the actual amount of money you owe in taxes. Basically, the credit acts like a rebate, effectively lowering the vehicle’s sticker price when your tax returns come in.

However, the tax benefits you may have heard about don’t necessarily apply to all vehicles. The money for these tax benefits was set aside by the government for a certain amount of vehicles of specific models, so not any plug-in hybrid is going to net you tax benefits. The amount of tax credits you can receive depends on such factors as the size of the battery, with larger electric batteries netting larger tax incentives. You can find an official list of applicable models, and the credits you can get with them, at the Department of Energy’s website.

fsn16_pg_027_ext_fullState Tax Credits

Besides this great federal tax benefit, there could be further tax incentives for you depending on which state you live in. While not all states offer additional tax benefits for buying a plug-in car, a great handful do. For example, California offers a few thousand dollars more in tax incentives, and Pennsylvania gives $2000 rebates depending on the vehicle’s battery. Not only that, but your state might also offer incentives if you car uses diesel or an alternative fuel source.

Before anything, you’ll want to look up your eligibility, as all state incentives differ and most have pretty strict guidelines as to how you can receive their tax benefits. These guidelines could differ from those outlined by the federal government. You can read more about each state’s incentives at Plug In America.


All of this sounds too good to be true, right? Well, depending on your situation, it could be. Unfortunately, there are quite a few guidelines you must follow in order to be eligible for these tax incentives. For example, along with requiring that you buy a certain model of car to be eligible, the federal incentive also only applies to a car you buy new. So, a car you buy used, or even lease, won’t net you that sweet tax credit.

Furthermore, these credits aren’t going to last forever. Because the government has set aside a certain amount of money to go toward these tax incentives, the more people who buy eligible vehicles, the less money there remains in the budget. This “phasing out” begins once the vehicle manufacturer has produced 200,000 of the model. Once the car is phased out, you’ll no longer be able to receive a credit for that vehicle. So, before you make the big purchase, be sure to check to see if incentives are indeed still available fro the model you want to buy.

If your vehicle model is eligible for a tax credit, all you have to do come tax time is fill out IRS Form 8936, which is the Qualified Plug-In Electric Drive Motor Vehicle Credit. Then, you can list your credit on your Form 1040 and deduct that amount from the total you owe. Note that if the car is to be used for business use, you’ll have to fill out Form 3800 instead. A tax credit isn’t quite the same as getting thousands off at the point of purchase, but along with the numerous other benefits you’ll get from buying a PHEV, who can complain about free money?

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