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The Hidden Trap of the Tax Credit for Electric Plug In Cars

Updated on September 30, 2017
wilderness profile image

Dan is a "backyard mechanic" who has always done his own auto repairs whether on motorcycles, boats, cars or even motorhomes.

A popular plug in car, the Prius
A popular plug in car, the Prius | Source

Electric Plug In Vehicle Tax Credit

Should you decide that a plug in car is in your future, Uncle Sam may well help you out with a federal tax credit, subsidizing your purchase. You can't assign it to a dealer as you won't see it until you file taxes for the next year, but it could be used to pay down a car loan, pay off another loan so the car payment is easier to make or any other use as you choose.

There are restrictions of course. The car must be new - you must be the first owner - and leased vehicles are not likely to conform as they are owned by a leasing company rather than the taxpayer using it. Many hybrids are not eligible as the energy ultimately comes from the gasoline engine, not a wall plug (the Volt and the Prius plug in are exceptions). Battery size is important - the credit is $2917 for the first 5 KWh (kilowatt hours) of battery capacity and an additional $417 for every additional KWh up to a maximum of $7500. The credit is phased out over time after the manufacturer has produced 200,000 vehicles. The car must be used primarily in the US.

The IRS publication IRC-30D covers this basic information and your dealer should be able to tell you just how much you would be eligible for.

So What's the Catch?

This all sounds good - the deep pockets of the Federal government will help you buy a "green" car, reducing the energy consumption and pollution of the country as a whole while saving you operating costs. A $7500 subsidy could well be the difference between buying a new car that will not only save money but help the environment as well, and buying another cheaper model that ends up costing twice as much over it's lifetime.

But there's a catch, and it's an ugly one. Unlike the Eearned Income Credit (EIC), this credit can only be used to offset your taxes owed. When it is figured on your tax forms the "credit" is limited to the "total tax" (line 61 on the 2013 1040 form) and cannot be carried to the next year if that figure does not come to what you would otherwise receive. If your car qualifies for the full $7500, as the Chevrolet Volt does, but you only owe $2,000 in federal taxes for the year it was purchased in, you can only get $2,000. Not the full $7500.

The result? Buyers living and working in Connecticut, earning the median wage of $106,000 for a family of four, will most likely have a tax liability of over $7500 and thus receive the full credit. Those in this writer's home state of Idaho and earning the median wage of $62,000 for that same family of four probably won't. Retirees all across the country that have very little income but do have a retirement account that could be tapped for a new car definitely won't. They simply lose out on the subsidy completely whether they buy the same car or not.

One argument "justifying" this plan is that it is a tax rebate - that if you aren't paying enough taxes to cover it you shouldn't get it. But Uncle Sam will spend the money, whether it is also given as a tax rebate or not, and there is only one place to get it. From those that are paying the full tax without a rebate. From the middle class, paying more in taxes to support the tax break of the wealthy that don't need it.

The middle class, then, and those with smaller or limited incomes, are providing a subsidy to the wealthy in their purchase of a car; a car that they too could perhaps afford if they just got the same handout from Uncle Sam upon purchase. Sound good to you?

An Electric car for you?

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The rich get richer

Does it bother you that you are subsidizing the wealthy?

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What Can We Do?

Truthfully, not much. This is just another case of shifting of the wealth upwards, increasing the gap between the wealthy and the rest of us, all paid for by the people struggling to make ends meet. This seems to be the way our country is heading.

Still, we can complain, and complain as loudly as possible. Write your congressmen and women, letting them know just how unfair this is - that if we are going to subsidize buyers of "green" vehicles it should not be limited to only those with large incomes and deep pockets. That the little people providing the subsidy through their taxes deserve the same treatment. And that changes should be made retroactive as far as possible as there are likely a great many buyers that expected to get a nice check come tax time only to be hoodwinked out of it.

Whether you agree with subsidizing electric cars or not, it is grossly unfair to limit the purchase subsidy to only the wealthy while denying it to the people not only paying for it but needing it the worst. Let your lawmaker know, and enlist the help of your friends. Show them this article and get their opinion (and hopefully their help as well). It only takes a few minutes to dash off an email to your senator or representative - let your elected officials know what you think of subsidizing the wealthy while the rest of us are denied the opportunity and just pick up the tab for it. It is your taxes paying for this - shouldn't you have the same chance as big earners to participate in the program?

© 2015 Dan Harmon

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    • profile image

      Pringgo Husin 

      5 weeks ago

      Great information Dan! I must say that I am quite disappointed if the tax credit came back less to me than what I was initially expecting. However, another factor that came across me while browsing for an electric car is the insurance. Apparently if I switch from my existing ICE car to an electric car, my insurance charges increases. Counting the tax credit and the cost savings I will benefit, it would mostly go to covering the insurance bill.

    • Kristen Howe profile image

      Kristen Howe 

      3 years ago from Northeast Ohio

      Great hub Dan. This is real interesting and informative about electric cars and the tax credit with it. Voted up!

    • Pro Shell profile image

      Pro Shell 

      3 years ago from Vereinigten Staaten

      Interesting.

    • wilderness profile imageAUTHOR

      Dan Harmon 

      3 years ago from Boise, Idaho

      It came as a shock to me; I was counting on that credit to reduce the car loan. I've had to re-think the whole purchase as a result.

    • drpennypincher profile image

      Dr Penny Pincher 

      3 years ago from Iowa, USA

      I would be quite disappointed if I was expecting a $7500 tax credit for buying an electric vehicle and ended up with something less... At the very least, this restriction should be better publicized. Thanks for the heads-up!

    • Ericdierker profile image

      Eric Dierker 

      3 years ago from Spring Valley, CA. U.S.A.

      I really followed this and you did a great job explaining the problem. Damn!

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