Electric vehicle (EV) incentives: What you need to know

Updated

A Tesla charging at a public EV charger
EV Incentives can drop the cost of your EV by thousands of dollars. Image source: InsideEVs

As a relatively new technology, electric vehicles (EVs) tend to be more expensive than comparable gas-powered cars. The higher price discourages many consumers, which is where EV incentives come in: they lower the upfront cost of electric cars, making them more financially achievable.

The most popular - and most valuable - incentive is the Federal Plug-In Electric Drive Vehicle Credit (we will refer to this as the ‘Federal EV Incentive’); it is worth up to $7,500. Unfortunately, the Federal EV Incentive isn’t available for all manufacturers - we’ll explain why later in the article.

Additionally, many states offer their own incentives in the form of rebates or tax incentives, giving you more ways to save.

Key takeaways

  • EV incentives can help reduce the upfront costs of buying an electric vehicle.
  • You can save up to $7,500 by using the Federal Plug-In Electric Drive Vehicle Tax Credit.
  • Tesla and GM have hit their incentive caps, so the federal incentive no longer applies to them. The Build Back Better Act proposes to remove the cap, and adds an additional $5,000 to the credit.
  • Many states and utilities offer additional incentives in the form of rebates and tax credits.

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    What is the Federal EV Incentive?

    The Federal EV incentive is a tax credit available for buying a hybrid or fully electric vehicle. You do not get the tax credit if you only lease the vehicle.

    The Federal EV Incentive is currently worth up to $7,500 for eligible vehicles, and the amount varies based on the capacity of the battery within the car. To qualify, the battery must have at least a 5 kilowatt-hour (kWh) capacity and plug-in charging capacity.

    Starting at a base of 4 kWh* battery capacity, for each addition 1 kWh of capacity the EV battery has, your car qualifies for $417 more in credits - capping at $7,500. If your car has a battery with a capacity of 16 kWh or over, like the Audi e-tron or the Ford Mustang Mach-E, then you will get the full $7,500 credit.

    *The calculations for this incentive are slightly confusing: the per-kWh component is calculated starting from a battery capacity of 4 kWh, even though the benefit itself doesn’t kick in unless your battery is at least 5 kWh in size.

    Will the EV I want qualify for the Federal EV Incentive?

    Currently, not all EVs will qualify - the incentive is capped to the first 200,000 vehicles sold per manufacturer. Once a manufacturer hits this cap, all subsequent EVs sold by that manufacturer no longer qualify for it.

    So far, only Tesla and GM have exceeded the cap, so the tax credit is unfortunately no longer available on their vehicles. All other car manufacturers other than these two still qualify for the full $7,500 incentive.

    An interesting thing to note is that if the Build Back Better bill is passed after this writing in November 2021, then the incentive will be extended, and, in some cases, increased. The $7,500 credit will become available for all new cars, and the 200,000 cap would be eliminated - great news for Tesla and GM fans. There would be an additional $5,000 in available incentives if the car and battery parts were built within the U.S. using union labor, making the total available tax credit $12,500.

    An expansion of the tax credit will assist American consumers by making EVs cheaper to buy, thus boosting the adoption of EVs.

    What is the downside to the Federal EV Incentive?

    The federal incentive was put into place to encourage consumers to purchase EVs that are slightly more expensive than comparable gas cars. Aside from the 200,000 cap that hinders your car choice, another downside is that the incentive is a tax credit.

    A tax credit is only available as a savings on your taxes. This means that if you are eligible for more incentives than what you owe in taxes, you will not be able to take advantage of the full incentive amount.

    For example, if you are eligible for a $6,000 credit but you only owe $2,000 in taxes, you will lose out of $4,000 because you cannot carry the benefits over to the next year. However, in many states there are additional utility and state incentives that can reduce the overall costs further.

    Work with your tax advisor to ensure that you get all of the savings available to you.

    What state and utility incentives are available?

    State and utility incentives vary greatly based on where you live. Some states offer nothing, some offer only time of use utility rate reductions - which you would get regardless of if you owned an EV - while others offer such great incentives that you can get an EV for incredibly cheap.

    One of the best types of incentives is a rebate - because it is essentially cash in your pocket - as opposed to tax incentives, which you might not qualify for. New Jersey, for instance, offers a great EV rebate of up to $5,000 to anyone buying an EV.

    The amount you get depends on the EPA-rated mileage range of your car, you receive $25 per mile but it is capped at $5,000, or 200 miles. What’s great is that this incentive is in addition to the tax credit, so you could potentially save $12,500 on an EV, a huge reduction in the cost.

    A popular incentive offered by some states and/or utilities is a rebate to save money when you install a level 2 charger in your home, for example the $300 rebate in Turlock, California. This does not do much to reduce the cost of the EV itself, but saves you money when you buy a charging port in your home.

    Top EV incentives in 2021

    Here are the most significant incentives currently available for the purchase of an EV.

    The best electric vehicle (EV) incentives in 2021
    Incentive Amount Availability Notes

    Federal EV Incentive

    Up to $7,500

    Nationwide

    Tax credit for purchase of new vehicles. Value based on battery capacity. Tesla and GM no longer qualify. 

    CT EV

    Up to $9,500

    Connecticut 

    Rebate available for residents who purchase a qualifying EV.

    NJ EV

    Up to $5,000

    New Jersey

    NJ residents can receive a rebate based on mile-range of the EV.

    CO EV

    Up to $2,800

    Colorado

    Tax credit eligible for Colorado residents that purchase an EV.

    There are many other smaller EV incentives on offer across the U.S., mostly from utilities. With a bit of research you should be able to find all applicable incentives in your area; a local car dealership can point you in the right direction.

    If you live somewhere with no additional incentives - and find that EVs are out of your budget - there’s still good news. The cost of EVs is decreasing overall, and will soon be on-par with the upfront cost of a gas-powered car.

    The decreasing costs of EVs overall

    As of November 2021, the average cost of an EV is about $36,000, while a gas-powered car is about $42,000. Obviously, this gas-powered cost is higher than the EV cost, but there are a lot of factors at play in late 2021 that are driving up the cost of cars in general.

    Based on the cost metric alone, EVs are cheaper because their overall average cost is $6,000 less than gas-powered vehicles - and cheaper to maintain and run over their lifetime too, by up to 40%.

    Keep in mind that the cost averages we've mentioned are just that; averages. The cheapest fully electric car you can buy is the Nissan Leaf starting at around $22,000. On the other side, there are gas powered cars that start as low as $14,000, a much more practical price for many Americans.

    Interior rendering of an EV battery
    EV car batteries are the most expensive component of an EV. Source: Car Magazine

    The reason EVs tend to have a higher price is because the cost of the batteries within them are expensive. This is due to the high cost of their raw materials, as well as the fact that they are still relatively new and have not yet become as economical to manufacture.

    But as battery production becomes more efficient and widespread, the cost of EVs will continue to decrease. Additionally, many EVs are “luxury” vehicles that appeal to early adopters who can afford the price tag. As they become more mainstream and easier to manufacture, cars with a price that appeals to more consumers will follow.

    Does an EV make sense?

    There are many benefits to owning an electric car, from reduced maintenance to a lower carbon footprint.

    Although the upfront cost might be more expensive versus traditional cars, an EV can still make financial sense. Federal EV incentives will help reduce the initial cost of the car, and the overall lifetime savings will keep your car ownership costs low.

    Pairing your EV with solar panels will make the costs even lower, further increasing your savings.

    While current EV incentives might be extended, there is no guarantee that this will happen. If you are thinking about getting an EV and want to take advantage of generous government incentives, now is a great time to take the plunge.

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     - Author of Solar Reviews

    Ana Almerini

    Web Content Specialist

    Ana is a content specialist at SolarReviews. She uses her experience in marketing and knowledge from her master's in climate communications to research and review the solar industry.

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