Car Industry

Why your shiny new electric car might not come with a full $7,500 tax credit

Mo' popularity, mo' problems.

Automakers releasing electric vehicles like to talk about "post-incentive" pricing. After all, who wouldn't jump at the chance to knock up to $7,500 off a car's price? The US government offers a tax credit worth up to $7,500 when you buy an EV, but as with all things tax-related, the incentive is more complicated than it may seem. You may not save any money at all, never mind the full $7,500.

The government's incentive is designed to help spur production of alternative-energy vehicles. It's important to note that it isn't a point-of-sale deduction on the car's window sticker, but rather a dollar-for-dollar reduction of your income tax liability. So you won't technically save $7,500 on the vehicle's price, but rather save $7,500 on your taxes.

In fact, your vehicle might not even be eligible for the full credit. The credit applies to any vehicle with a battery larger than 5 kWh. You'll get $417 credit for that initial 5 kWh, plus an additional $417 for each kilowatt-hour above that. Tesla's 90-kWh battery would have been eligible for a $35,862 credit under this system, so the IRS capped it at $7,500. Since the threshold for battery capacity is so low, some plug-in hybrids are eligible for the credit, as well.

Now let's talk about limitations on this credit, because they won't last forever. Automakers can give out 200,000 full ($7,500) tax credits each, and a phase-out process begins once that number is reached. The IRS cuts the credit in half ($3,750) for the following two fiscal quarters, then halves it again ($1,875) for two more quarters. After a full fiscal year of phase-out, the credit disappears.

General Motors recently told me that it had sold approximately 100,000 credit-eligible vehicles already, split between the Volt, Spark EV and Cadillac ELR. Assuming that every buyer applied for a credit (in fact, not everyone bothers), that means there are roughly 100,000 full tax credits are still available for Bolt buyers. Automotive News used data to posit that Tesla's sold a bit over 70,000 eligible vehicles so far.

Over 300,000 people have already put down $1,000 deposits to reserve a Tesla Model 3, which has an after-credit base price of about $30,000. While some might be able to claim that full $7,500 credit, many more will have to make do with lower (or nonexistent) credits, which will push the car's bargain-basement price up near the $40,000 mark.