How Does the Federal EV Tax Credit Work If I Don't Owe Taxes?

If you don't owe any money on your income taxes, the only way to take advantage of the federal EV tax credit on a car is to transfer it to the dealership you're buying from. It then can be applied as a discount on the purchase. There's more to it than that, which we'll cover here in greater detail.

EV tax credit basics

The U.S. government wants to encourage new-car shoppers to buy electric vehicles over gas cars, so it introduced a federal tax incentive that allows buyers purchasing an EV or plug-in hybrid to get up to a $7,500 break in taxes. Getting that much extra money on your tax return sounds excellent. However, there are several requirements regarding which vehicles qualify and what customers can earn the credit. We cover these requirements in greater detail in this article, so give it a read if you're unfamiliar with the rules. Here, we'll focus on how the EV tax credit works if you don't owe anything on your taxes. Let's dive into the details so you know how to maximize your savings on either your taxes or your EV purchase.

Maximizing the EV tax credit savings

In general, you need to have a tax liability — owe money on your income taxes — to have the EV tax credit applied to your taxes. Let's say your tax liability is $2,500, but you purchased an EV eligible for a $7,500 tax credit. In this scenario, you could only have $2,500 applied to the taxes you owe since the federal tax credit is nonrefundable. This means you'd be leaving $5,000 on the table.

As we noted earlier, there is a work-around for those who have a tax liability less than the EV credit. Starting this year, buyers can now transfer the full credit directly to a dealership, essentially creating a discount on the purchase.

The IRS' FAQs address this specifically: "The amount of the credit that the electing taxpayer elects to transfer to the eligible entity may exceed the electing taxpayer's regular tax liability for the taxable year in which the sale occurs, and the excess, if any, is not subject to recapture from the dealer or the buyer."

In other words, transferring the EV tax credit to a dealership not only bypasses the tax liability requirement but also gives you access to the money more quickly and practically. By the time you read this, most major dealerships should already have some experience with such transfers. If not, check with the finance office. The key thing to know is that you must purchase the EV or PHEV at a dealership familiar with this process.

When it is time to sign the paperwork to close the deal on your EV, ask the salesperson for a copy of the "time of sale report" and confirmation the report was accepted. You'll need to prove which model you bought, and when and where you bought it, for your tax return.

This method only applies to those who owe less than the tax credit or have no tax liability. If you make more income than the authorized limits, this work-around won't work for you and you'll need to repay the IRS come tax time.

How does the EV tax credit work if I'm leasing and don't owe taxes?

If you're leasing an eligible plug-in, the tax credit goes to the finance company since it technically owns the vehicle. On the one hand, this scenario removes the income and manufacturing requirements for the tax credit, which expands the selection of vehicles. But on the other hand, it also means that the finance company is not obligated to pass those savings on to you. That said, many automakers' finance arms are offering the EV tax credit as an incentive to lease, so it's worth asking about. You can also find this information on the brand's incentives or special offers page.

How does the EV tax credit work if I'm buying a used EV and don't owe taxes?

Used EV shoppers who don't owe anything on their taxes can choose to transfer the EV tax credit to the dealership at the time of sale, in the same way they would for a new car purchase. The requirements are slightly different for used cars, however.

A used-car shopper must buy the EV or PHEV from a dealership and have a max modified adjusted gross income (MAGI) of $75,000 to $150,000, depending on the shopper's filing status. The car must be at least two model years old and have a maximum selling price of $25,000 (before tax and title). If you check all these boxes, you can get up to $4,000 from the government when you file. You'll still need to ensure that the dealership files a "time of sale" report and provides you with a copy so that the transaction is properly documented on both sides.

Claiming the EV tax credits and other incentives

If you are eligible or prefer to have the EV tax credit applied to your taxes, the IRS requires you (or your tax preparer) to file Form 8936 with your tax return to claim either the new or used EV tax credit. And you can file for multiple vehicles, but you can only file for a used EV every three years.

In addition to the federal tax credits, some states offer rebates on electric vehicles, but they vary. Some even offer rebates on installing charging stations at homes or access to carpool lanes regardless of the number of passengers. Edmunds has a detailed list of federal, state and local electric car incentives here.

You can read the ins and outs of the federal EV tax credit and what vehicles currently qualify here in case you missed it earlier.