Everything EV buyers need to know about proposed changes to the federal electric vehicle tax credit for 2021

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The federal tax credit for electric cars in 2021 could be renewed and expanded. Even Tesla and GM could be included, despite those manufacturers having hit the 200,000 cap.

The current federal tax credit on electric cars has been remarkably successful. But as we move forward into 2021 and beyond with EVs becoming far more popular, the limitations on the existing tax credit are starting to show.

Here's where we stand: The existing federal EV tax credit promises a dollar-for-dollar credit of up to $7,500 to anyone buying an electric car in the U.S., but there are several limitations. The biggest is that once a car company sells 200,000 electric cars, the credit is phased out for that manufacturer's brand. Both Tesla and General Motors have exhausted their credits, which means buyers of any of those makers models — including the Chevrolet Bolt EV and the Tesla Model 3 — do not get any federal credits.

The second is that the credit is complicated and difficult for even savvy buyers to understand. It's what's known as a "nonrefundable tax credit" which means that if the credit exceeds your total tax bill, you do not get that money "refunded" to you anyway. Put another way, if your total federal tax bill is $5,000, you can't use more than $5,000 of the EV credit, and the remaining $2,500 is lost. It can't carry over until the next tax year.

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The net effect is that only car buyers that actually pay that much in annual federal income tax can take full advantage, and the credit is only available when your taxes are filed, so if you bought a car in, say, January 2021, you might not get a refund until April 2022, after you file your taxes next year.

A number of fixes have been proposed, but the biggest one is the Clean Energy for America Act, introduced earlier this year by Senator Ron Wyden (D-Oregon). Though the bill is unlikely to become law in its current form, it is a starting point for larger infrastructure and green energy negotiations.

Among other things, the proposal increases the maximum tax credit for an electric car to $12,500, though there are several tiers to this. All EVs receive a $7,500 credit, with an additional $2,500 if final vehicle assembly occurs in the U.S., and another $2,500 if the car is built by union workers. It would also lift the production limit, allowing both Tesla and GM buyers to claim the credit, until 50% of all vehicle sales from all manufacturers in the country are electric vehicles. It would also only apply to EVs with a sticker price under $80,000. That means anyone eyeing a Tesla Model S Plaid won't see a dime of the tax credit. But then, someone who is paying $129,990 for a vehicle probably isn't too worried about a $7,500 discount. That would be ludicrous.

It's likely that several of these provisions may be unworkable to large portions of the Senate in particular, so it remains to be seen what negotiations can deliver.

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This week, ten moderate U.S. Senators agreed to a bipartisan infrastructure framework that has been endorsed by President Biden. The details have yet to be worked out, but there are two major electric vehicle-related bullet points.

The first would build a national network of EV chargers "along highways and in rural and disadvantaged communities," the White House said. The EV infrastructure line item is earmarked for $7.5 billion (out of $312 billion for all transportation projects in the bill).

The second would see $7.5 billion set aside to electrify school and transit buses across the country. Other parts of the bill would rebuild and repair roads and bridges, eliminate lead drinking water pipes, and expand high-speed internet access.

SEE: Electric vehicle charging company announces first open charging platform (TechRepublic)

All of these bills and proposals are subject to change as they move through the legislative process, and they might all be killed thanks to the complications of Washington politics these days. Reworking the EV tax credit is also left out of the new bipartisan infrastructure deal, but this is a priority for Democrats, so expect it to receive a lot of attention as negotiations continue.

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