What you need to know about Tesla Model 3 tax credits

Written by Vid Ponnapalli, MS, CFP®, EA

Vid Ponnapalli is a Fee-Only financial advisor providing Customized Financial Planning, Investment Management, and Tax Services for Busy Professionals in New Jersey, New York City, and across the country.

April 2, 2016

Elon Musk, CEO of Tesla announced Model 3 offer at a low price tag of $35,000. He says all you need is to put down a refundable $1,000 deposit and wait until sometime in 2017 to get your keys.

Uncle Sam says he offers you tax credits for owning an electric car. He says these credits are generous with a federal tax credit up to $7,500 and if you live in a state such as California, state tax credits up to $2,500.

Excited? Should you add all these up and say you are getting into a Tesla Model 3 by the end of 2017? I am not so sure about that! The devil is in the details. Here are some of those details that could help your decision making. Read on…

Current Tax credits

According to this IRS publication, for Qualified Plug-in Electric Drive Motor Vehicles, federal tax credits start at $2,500 and based on the battery capacity of the vehicle, go up to $7,500. The credit for a Tesla Model S is $7,500.

In addition, you could be eligible for some sweet state tax or rebate incentives. However, the rules around whether you get a rebate or a tax credit, whether you get an exemption, or whether there are any income caps to become eligible, etc., are very state-specific. For example, while my State of New Jersey offers a Sales tax exemption without an income cap, California provides a rebate up to $2,500 for Tesla owners as long as they meet certain income cap criteria ($250,000 for Single, $500,000 for married filing jointly). Other states have similar rules specific to their state. Accordingly, it is important for you to find out your state specific rules to understand the exact amount you qualify for.

When and how the credits phase out

And here is the most important part of the federal tax credit: IRS states that the credit phases out once the manufacturer sells at least 200,000 vehicles in the United States. Here is the exact text from IRS website:

Qualified Plug-In Electric Drive Motor Vehicle Credit (IRC 30D) Phase Out

The qualified plug-in electric drive motor vehicle credit phases out for a manufacturer’s vehicles over the one-year period beginning with the second calendar quarter after the calendar quarter in which at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009) (“phase-out period”). Qualifying vehicles manufactured by that manufacturer are eligible for 50 percent of the credit if acquired in the first two quarters of the phase-out period and 25 percent of the credit if acquired in the third or fourth quarter of the phase-out period.  Vehicles manufactured by that manufacturer are not eligible for a credit if acquired after the phase-out period.

What this means is if Tesla sells 200,000 vehicles in the United States by the time you get your keys to the model 3, your credit could be limited. As per these IRS guidelines, here is the bottom-line impact for your Model 3 in the phase-out period:

  • $3,750 if you acquired your Model 3 in the first two quarters of the phase-out period
  • $1,875 if you acquired your Model 3 in the second two quarters of the phase-out period
  • $0 if you acquired your Model 3 after the phase-out period



The simple answer: No, you are NOT guaranteed. . Why is that?

Several reports indicate Tesla sold more than 100,000 vehicles globally as of this writing. However, how many of these vehicles are sold in the United States is unclear. Accordingly, my common sense tells me it is difficult to judge whether or not Tesla will reach the 200,000 vehicles limit in the United States by the time you get your keys to your Model 3. So, it all depends on what happens between now and by the time you take the possession of the vehicle.

To summarize, it may not be a wise financial decision to commit to a Model 3 now based solely on the tax breaks you might get when you acquire the vehicle. 

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