How does the electric car tax credit work?

You may be eligible for a tax credit if you purchase a plug-in electric car, including a Tesla. Here's what you need to know about the electric car tax credit.

What's a tax credit?

A tax credit reduces the amount of tax you owe. It reduces your tax liability dollar-for-dollar. Non-refundable tax credits expire the year they're used (or not used). Refundable tax credits can increase your tax refund if not used.

A tax credit and tax deduction both provide tax breaks. The difference is a deduction can reduce the amount of your taxable income.

What is the electric car tax credit?

The government aims to spur the electric-car industry and introduced an electric car tax credit in 2008. This financial incentive offers up to $7,500 in a non-refundable tax credit for new electric vehicles purchased by taxpayers.

How does the electric car tax credit work?

For electric vehicles purchased after December 31, 2009, you get a credit for at least $2,500. The tax credit can increase up to $7,500 depending on a few qualifiers:

• The kilowatt capacity
• The number of electric vehicles the manufacturer sold

You receive an additional $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours. The credit begins to phase out after a manufacturer sells at least 200,000 vehicles. Tesla is the only company that's hit the 200,000 threshold so far.

Are there any other incentives for buying an electric vehicle?

Many states also offer incentives for buying an electric vehicle. This may include tax credits, access to carpool lanes and more. The Department of Energy offers a website to find which state laws may apply to you.