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Electric car tax credits: What you need to know about EV financial incentives

1-pedal driving: The best thing about driving an electric car
(Image credit: Nissan)

Governments all over the world are quite keen to get people to adopt electric cars. But there’s only so much they can do by threatening to ban the sale of new gas-powered machines. Which is where financial incentives come in.

By appealing to your wallet, governments hope to encourage people to get off the fence and make the switch to an electric vehicle of some kind. The only issue is knowing what those incentives are, and how you can claim them. 

However, there are a lot of incentives with different eligibility criteria. In the U.S. there are also different kinds of incentives based on what state or even city you live in. 

So let’s break down some of the more common financial incentives available, to better help you understand exactly how much money you’re eligible to claim once you actually buy an EV.

EV financial incentives available in the U.S.

The $7,500 federal tax credit

The main financial incentive available to EV buyers in the U.S. is a $7,500 tax credit. In short, anyone in the United States who purchases a brand new eligible EV can claim a tax credit worth up to $7,500. 

The key thing to remember here is that not all EVs are eligible for the grant. Most EVs on sale in the U.S. are, but that changes once the parent company sells more than 200,000 EVs. This is the reason why Tesla and General Motors EVs are ineligible —they’re just too darn popular.

You can check if the car you’re looking to buy is eligible over on the U.S. Department of Transportation’s website (opens in new tab). Certain plug-in hybrids are also eligible, though the credit is based on the amount of available battery capacity. As such, a number of them, like the Prius Plug-in Hybrid, aren’t eligible for the full $7,500.

It’s worth pointing out that the credit only applies to new vehicles, not used, and only if you buy the car yourself. Leasing doesn’t count, though it does allow leasing companies to claim the relevant credit for themselves.

How much you can claim back will also depend on your income (opens in new tab), and how much income tax you actually owe. For instance if you owe $5,000 in income tax, your EV tax credit will be capped at $5,000.

How to check local incentives

In additional to federal incentives, some state and local governments also offer incentives if you purchase an EV. However, these incentives not only differ from state to state, but they can also be different from city to city too.

The U.S. Department of Energy has a tool (opens in new tab) to help you find Federal and State incentives for alternative fuels, though this does include a lot more than just electric cars. It's a bit difficult to navigate, but is worth checking out, as it includes incentives offered by private companies, and not just the state government.

For instance, the California Air Resources Board will offer a point-of-sale rebate of up to $1,500 (opens in new tab) if you purchase or lease a new EV or plug-in hybrid as part of the Clean Fuel Reward Program. 

However, Arkansas doesn’t offer individuals any extra financial incentives to purchase any kind of electric or hybrid vehicle. In fact, the state makes owners of such cars pay an extra annual tax (opens in new tab). It’s $200 for EVs, $100 for plug-in hybrids, and $50 for other hybrids.

So be sure to check out the list and see what the deal is where you live. After all, electric cars can be pretty pricey, and if those incentives make the difference between buying one or not, you should take full advantage of them.

Possible future incentives

The future of EV incentives isn’t certain just yet, but lawmakers have been making some moves to change the way the U.S. government can encourage people to ditch gasoline.

The proposed ‘Affordable EVs for Working Families Act (opens in new tab)’ would offer a tax rebate of up to $2,500 for buying a used electric car. However, it would be limited to one credit every three years, and phased down for buyers who earn more than $75,000.

Considering used EVs typically aren’t eligible for financial incentives, and not everyone can afford to buy a brand new electric car, this would be a big win for EV adoption. 

The U.S. has also proposed a new additional (opens in new tab) $4,500 tax credit for EVs assembled by union workers, plus an additional $500 for cars that use U.S.-made batteries. Including the existing $7,500 tax credit, it means EV buyers could recoup up to $12,500 if they buy the right model of electric car.

However this move has come under fire from non-domestic automakers, like Toyota and Honda, as well as Tesla, whose workers are not unionized.

But the move would also remove the 200,000 sales limit from the credit, which would make GM and Tesla cars eligible once again. The credit would also last 10 years, giving customers the option of when they can claim it back on their taxes.

EV financial incentives available in the U.K.

Right now the primary financial incentive on offer to EV buyers in the U.K. is a plug-in vehicle grant (opens in new tab). This grant is worth up to £2,500, and applies to the purchase of a number of zero-emission vehicles.

The grant itself will cover up to 35 percent of a car’s purchase price, minus any optional extras a customer buys, provided that price is under £35,000. Unfortunately it only applies to new EVs, meaning used electric cars are ineligible.

Unlike the U.S. system, which awards buyers with a tax credit, this grant is essentially a discount offered at the point of sale. In other words, all the hard work is done by the dealership, and the price you see advertised has already taken the grant into account. 

The grant also applies to electric motorbikes, mopeds, vans, taxis, and trucks, provided they are both on the approved list and meet the emissions criteria. But the amount the grant will cover does differ based on the type of vehicle in question.

The U.K. government also offers money towards the cost of installing a home charger. The Electric Vehicle Homecharge scheme covers up to 75% of the cost of a home EV charger up to the value of £350. Again, this amount is deducted from the price by approved installers, so the price you see is the price you pay — provided you’re eligible.

However there are a lot of eligibility requirements (opens in new tab) for people to claim this grant including, but not limited to, actually owning an approved (opens in new tab) electric car, haven’t claimed against the scheme before (unless they own two EVs concurrently), and the property meets the stringent requirements laid out by the government. Those requirements include having sole access to private off street parking, not allowing cables to cross onto public land, and more.

Future of U.K. EV incentives

The U.K. government recently announced there will be a £620 million (opens in new tab) investment in electric car grants, which will be distributed to fund on-street residential charging as well as personal plug-in vehicle grants. In other words it will continue to allow drivers to get a discount on new electric vehicles.

This is good news, considering there had been rumors the U.K. government would be scrapping the plug-in vehicle grant, particularly after comments (opens in new tab) made by then-Parliamentary Under-Secretary of State for Transport Rachel Maclean in July. Maclean commented that the grant could disappear “over time.” Fortunately it appears that that time is not now.

It’s not clear what the new investment will mean for the EV grant as it stands, especially since the grant itself has been reduced over the years. The most recent change was a reduction from £3,000 to £2,500 back in March 2021, and reduced the value of eligible cars from £50,000 to £35,000. So we’ll just have to be patient and see what the government has planned.

Tom is the Tom's Guide's Automotive Editor, which means he can usually be found knee deep in stats the latest and best electric cars, or checking out some sort of driving gadget. It's long way from his days as editor of Gizmodo UK, when pretty much everything was on the table. He’s usually found trying to squeeze another giant Lego set onto the shelf, draining very large cups of coffee, or complaining that Ikea won’t let him buy the stuff he really needs online.