How can you get up to $7,500 in tax credit from the federal government, save a lot of money on gas, and do something good for the environment? The answer is shockingly simple: buy a new electric or plug-in hybrid car this year.

If you’re in the market for a new car, going green may save you a lot of green at tax time. Whether you already bought an electric vehicle this year or are thinking of buying one, here are some facts to know to help you claim the electric car and vehicle tax credit.

Electric Car And Vehicle Tax Credit Calculation

The electric car and vehicle tax credit amount is based on the vehicle’s battery size. Qualifying electric vehicles are eligible for a $2,500 credit, plus $417 for a rechargeable battery of up to 5-kilowatt hours, and $417 per additional kilowatt hour over the original 5-kilowatt hours.

The credit maxes out at $7,500 but begins to phase out once 200,000 vehicles of a qualifying model have been sold since December 31, 2009. So a lot of popular hybrids — vehicles that use a combination of gas and electricity — are only eligible for much smaller credits. However, there are still many plug-in electric cars currently eligible for the full credit.

To see a full list of eligible electric vehicles, look at the IRS Qualified Vehicles List.

Check For State And Local Credits and Perks Too

A lot of cities offer special parking or free charging stations for electric cars, and many states offer additional tax credits for qualifying electric vehicles. For example, Colorado offers up to $5,000 in tax credits for qualifying electric cars, which include not just newer electric vehicles, but also cars converted from gasoline to electricity. Check your state’s laws to see if there are additional tax credits available for you.

Mileage Deduction/Reimbursement

If you’re self-employed and use a qualifying electric or hybrid vehicle for business, you could really save on your federal taxes. The federal standard mileage reimbursement rate is 54.5 cents per business mile driven. With the added efficiency of an electric or hybrid vehicle, you could end up coming out way ahead in terms of tax savings compared with your actual costs of operating the vehicle.

This same principle will also help if you work for a company and are reimbursed for your mileage. Either way, owning an efficient electric or hybrid car can end up benefiting you more than just lower gas and maintenance expenses. But be sure to track your mileage accurately to take advantage of mileage tax deductions and company reimbursements.

Cars Not Eligible For The Electric Car And Vehicle Tax Credit

• Traditional hybrids that cannot be plugged into a power source
• Clean diesel cars
• Cars converted to electricity from gas
• Used cars, even if the first owner did not claim the tax credit
• Electric cars not primarily used in the United States

Qualifications And Limitations

The electric car and vehicle tax credit cannot be passed on from the original owner; it’s only eligible for new vehicles. So if you’re buying a used car, the tax credit will not apply. Also, be aware that the tax credit goes to the name on the title of the vehicle. If you’re leasing the car, the leasing company will be the one to receive the credit. However, most leasing companies pass this credit on to the consumers by factoring it into the price, which in turn lowers the monthly payments.

The electric car and vehicle tax credit is a non-refundable credit. So if your tax liability is $4,000 and you receive the credit for the full $7,500, you’ll be able to reduce the amount you owe to zero, but you won’t get a refund for the difference (in this case, $3,500). The tax credit must be claimed the year you buy the car and cannot be carried over from year to year or claimed more than once. To claim the electric car and vehicle tax credit, use IRS Form 8936.

Have questions? Contact Robert Hartman.