Guide to Plug-In-Hybrid Tax Credits

2024 toyota rav4 hybrid
Guide to Plug-In-Hybrid Tax CreditsToyota

Car shoppers are increasingly aware of electric vehicles on the market. Many have heard about government incentives when purchasing a vehicle that plugs in, and plug-in-hybrid (PHEV) as well as battery-electric vehicles can qualify for tax incentives.

There are a number of requirements involved, and a new change that'll take effect in 2024. For plug-in hybrids specifically, the number of vehicles eligible for the purchase incentive is a mere seven (compared to 15 battery-electrics).

There's a workaround: any PHEV qualifies if it's leased rather than bought outright. That's because the vehicle maker or lessor receives the full incentive as a commercial transaction, which differs from the retail sales to which the purchase incentives apply. It's complicated, but all you need to know is that leasing is the loophole.

What Models Qualify for Incentives?

Of the seven eligible PHEVs, six are SUVs or crossovers, and one is a minivan. To qualify for the federal incentives, vehicles purchased between April 18 and December 31, 2023, must have been assembled in North America, with specific constraints on the sources of their battery minerals and cell and pack assembly.


Just two of the seven PHEVs qualify for the full $7500 incentive: the Chrysler Pacifica Hybrid minivan and the Lincoln Aviator Grand Touring version.

The other five receive only a partial credit of $3750, either because their battery minerals come from countries not on the approved list (notably, China) or 50 percent of the value of their battery pack did not come from components manufactured or assembled in North America. That requirement will increase by 10 percent in each of the next five years.

The five PHEVs that receive a $3750 credit are the BMW X5 xDrive 50e, the Ford Escape PHEV, the Jeep Grand Cherokee 4xe and Wrangler 4xe, and the Lincoln Corsair Grand Touring.

Remember, any plug-in hybrid, including those from Hyundai, Kia, and Toyota (such as the RAV4 Hybrid, pictured) and other models from BMW, becomes eligible for the credit when it's leased—even if the lessee ends up buying it at the end of the lease period. That amount is generally used to lower the total value of the lease, to make the vehicle more affordable. After all, increasing PHEVs' affordability has been the goal of the incentive program since 2011.

How Do Incentives Work in Practice?

For the balance of 2023, the incentive remains an income-tax credit applied to the buyer's tax liability for the year of purchase. Eligible vehicles must have MSRPs below $55,000 for passenger cars and $80,000 for light-duty trucks, a category that includes all but a small number of SUVs and crossovers. There are also income caps, though they're fairly generous, starting at $150,000 for single filers and $300,000 for married couples filing jointly.

To claim the tax credit, the buyer must file Form 8936 (Qualified Plug-in Electric Drive Motor Vehicle Credit Including Qualified Two-Wheeled Plug-in Electric Vehicles) with their tax return. Note that the credit is non-refundable, meaning that if the credit exceeds the amount you owe in taxes, it will zero out what you owe but you won't get any excess credit back in cash.

The big change that will go into effect for 2024 will allow buyers to transfer their tax credit directly to the car seller, so its total value can be subtracted from the price they pay. This is a change EV advocates have pushed for over many years. It brings the benefit right into the actual purchase process, transferring a credit applied to a tax return into one of the best ways to close a car sale: cash on the hood.

Buyers receive the benefit of that lower price immediately, versus up to 15 months later when they file their taxes. The amount to be financed gets lower, reducing monthly payments and making EVs more affordable to a greater number of buyers. The same MSRP caps and purchase income limits still apply, and the purchase must still be conducted at a dealer or business registered with the IRS to use the credit.

Dealers will be working out the specifics of the process over the balance of 2023. But come 2024, cutting the cost of a PHEV—or, for that matter, a battery-electric vehicle—gets far easier and more practical.

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