Electric Car Buyers Can Get Up to $7,500 in Tax Credits -- but Here's Why You Might End Up With Much Less

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  • Those who purchase an electric car could score some serious tax credits in the process.
  • The nonrefundable nature of those credits could make them less valuable for some car buyers.

Don't count that $7,500 just yet.

Buying a car has gotten expensive. And because vehicle prices are up across the board, many people are dipping deeper into their savings to come up with down payments, while signing up for higher auto loans than they're comfortable with.

If you need a new car, you may be thinking of making the switch to an electric vehicle. Given the way gas prices have risen this year, it's easy to see the appeal of a car that simply needs to be charged in order to run. And while electric vehicles generally cost more than those powered by gas, the good news is that the federal government is offering up to $7,500 in tax credits to some eligible buyers.

But while a $7,500 tax credit might seem great, you may not end up with that much money after your electric vehicle purchase. Here's why.

The credit isn't refundable

A tax credit is a dollar-for-dollar reduction of your tax liability. It's different from a tax deduction, which will simply exempt a portion of your income from taxes.

Tax credits come in two varieties -- refundable and non-refundable. A refundable credit will pay you money, even if you owe the IRS nothing. 

So, let's say you wind up eligible for a $2,000 tax credit that is refundable, only you owe the IRS no money. In that case, the IRS will have to send you a $2,000 check -- or send $2,000 directly into your bank account

Now, let's say you qualify for a $2,000 non-refundable tax credit. If you owe the IRS $500, that credit will reduce your $500 tax bill to $0. But you won't get the remaining $1,500 back. 

That's the trap some people who purchase electric vehicles could fall into. While you may be eligible for a $7,500 tax credit in theory, you need to owe the IRS that much money to actually get the full benefit of the credit. 

Meanwhile, many tax filers routinely get a refund year after year, which means they don't end up with a big IRS liability -- quite the contrary, they don't owe a dime. So even if you buy a vehicle that meets the requirements to get $7,500 back from the IRS, that credit may, in reality, be worth $0 because of your personal tax situation. 

Don't be lured by a generous tax credit

You may have your reasons for wanting to buy an electric car, such as wanting to get around in a more eco-friendly manner and not wanting to rack up huge credit card bills in the course of filling up on gas. But before you start counting the $7,500 you think you'll get back, read up on how the tax credit works and assess your own tax situation to see if you're likely to even benefit from that credit. 

Otherwise, you could end up sorely disappointed in your decision to go electric. And worse yet, you might end up with higher car payments you have a hard time keeping up with.

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