Tesla Tax Incentives: The Federal Credit System Explained
ValueWalk
When it comes to buying electric vehicles, one of the selling points automakers rely on is tax incentives. Currently, the federal government and some states are offering incentives to get consumers to purchase electric or hybrid vehicles. Unfortunately, those incentives won’t last forever, but the good news for those looking into Tesla tax incentives is that the federal incentive is based on the number of vehicles rather than any particular length of time.
At least for now, Tesla is still a low-volume niche automaker. That could change though, if the company is successful in its plan of becoming a mass-market automaker. But for now, the list of Tesla tax incentives includes a federal tax credit, among other incentives, and when the clock starts counting down, the best thing Tesla can do is crank out as many vehicles as it can when it hits one key milestone.
Federal tax credit tops the list of Tesla tax incentives
Tesla published a list of all the available credits or incentives buyers can receive if they purchase one of its cars. Out of all the Tesla tax incentives, the federal income tax credit is the biggie as it amounts to $7,500 off the buyer’s income tax return. Buyers in some states can also claim other credits or advantages.
In addition to being the biggest credit related to an EV purchase in most states, the federal tax credit is also the most confusing. Only the first approximately 200,000 people to receive their Teslas in the U.S. will receive the full $7,500 tax credit. I say “approximately” because the tax credit will start to be phased out after the company delivers its 200,000th vehicle in the U.S. Keep reading for a full explanation because this is complex.
Buyers must also meet certain other requirements, such as owing at least $7,500 on their federal taxes for that year. It’s a good idea to check with your accountant, a tax pro or the company to see whether you will be eligible to claim the full credit.
Here’s where the federal tax credit gets confusing
The full $7,500 credit also applies to all vehicles sold between the 200,000th car and the end of the quarter in which that car was delivered. The full credit also lasts through the end of the quarter following the quarter in which car number 200,000 was sold.
So when Tesla hits 200,000 U.S. deliveries, the clock starts ticking, first to the end of the quarter in which that milestone was reached, and then to the end of the next quarter. After that, the federal tax credit begins to shrink. It goes to $3,750 for the two quarters (six months) after that, and then to $1,875 for the next two quarters (six months). At that point, the tax credit is done, and no other buyers will be eligible for it. It’s anyone’s guess whether those who order a Model 3 today will be eligible for any credit at all, but it seems very unlikely that they will be, given that Tesla has already taken more than 400,000 preorders.
When will no more Tesla buyers be eligible for the federal credit?
Based on Tesla’s own quarterly delivery reports, it most likely passed the halfway mark for receiving the full federal tax credit in the fourth quarter of last year. However, we can’t be precisely sure because it has also been delivering a lot of cars overseas. The count for the federal tax credit only includes vehicles delivered to buyers in the U.S. The good news is that Tesla is ramping production fast, so the more vehicles it can build in the quarters immediately following car number 200,000, the more buyers will be able to get the federal tax credit.
Various sources offer up projections of when the federal Tesla tax incentives will start to wind down. One of the more recent projections was posted to the Tesla forums not long after the company reported that it had sold just over 25,000 vehicles in the first quarter. The problem is that we don’t know how many of those vehicles were delivered in the U.S., so the forum user offered two different scenarios.
In the first scenario, the ramp of production on the Model 3 goes smoothly as Model S and Model X sales rise by more than 10% each quarter, which could have Tesla hitting 200,000 sometime in the fourth quarter of this year. That would mean the full credit would go through the end of the March 2018 quarter and the credit would end in the March 2019 quarter.
The other scenario is for a slower Model 3 ramp and slower Model S and Model X sales increases, which pushes the 200,000-vehicle milestone out to the first quarter of 2018.
Other Tesla tax incentives
Several states are also offering Tesla tax incentives, which would be on top of the federal credit. For example, Arizona buyers will pay a lower vehicle license tax and receive access to the carpool lane and lower rates to charge their Tesla. California buyers who satisfy certain requirements for income can receive a $2,500 rebate, while Delaware offers a $1,000 rebate for all buyers. Colorado buyers can receive a $5,000 tax credit.
In Louisiana, Tesla buyers may be eligible for an income tax credit ranging from $6,900 to $9,500, depending on the type of battery they choose. Just think: if you live in Louisiana, you could be eligible to receive $17,000 off your car in the form of tax credits. Of course you must receive your vehicle before the federal tax credit starts ramping down.
Massachusetts, New York, Oregon, Pennsylvania and Rhode Island are all offering rebates of varying sizes on the purchase of a Tesla. However, some states have either run out of funds or are starting to run out of funds set aside for the EV purchase rebates, which demonstrates further how time is winding down for those interested in Tesla tax incentives. For more details on state-specific Tesla tax incentives, check out the listing on the company’s website.
What if you win a Tesla instead of buying one?
Every so often, we run across organizations that are running a contest and offering a Tesla as the grand prize. Climate XChange is running one such contest to raise awareness for carbon pricing. The grand prize for the raffle is a Model S or Model X, while the second and third place prizes are help with buying a Model 3 in the form of cash and a reservation.
The folks at Climate XChange also included the federal income tax payment in the prizes so that those who win the cars can actually take them rather than settling for cash because they can’t afford the tax payment on the car. Whenever a car or anything else expensive is won, the winner is usually required to pay the income tax payment on the value of it up front, which keeps many people from actually claiming a car or other expensive prizes because they don’t have an extra $25,000 in cash just lying around unused.
The Climate XChange team also tells us that the federal tax credit still applies if you win the vehicle in their contest rather than buy it. Winners get the chance to customize their car with plenty of options—up to $120,000 in value, with the tax payment on top of that. Some of the other Tesla tax incentives may apply as well, although it depends on the state of course so you would have to look into that if you happen to win the raffle. This is certainly a unique raffle though because they’ve built the income tax payment into the prizes so that the winners can actually take the cars.
