Published on April 19th, 2016 | by Chris Boylan25
Tesla Model 3, The Federal EV Tax Credit, & You (FAQ)
April 19th, 2016 by Chris Boylan
Tesla Model 3 Buyers Ask, “Will I Get the Federal EV Tax Credit/Rebate?” And We Answer
With all the excitement about the upcoming “affordable Tesla” — the Model 3 — one of the questions we’re hearing from many of our readers is, “Will I be able to take advantage of the federal EV tax credit of $7,500?” With its price starting at $35,000, the Model 3 is roughly half the price of Tesla’s least expensive current offering (the Model S), but still out of reach for many car buyers. With current federal and state incentives in place for buying emissions-free vehicles like Plug-in Electric Vehicles (PEVs), the net price paid for the Model 3 can be reduced significantly. But these incentives are only temporary, and some won’t last for much longer. So how can a prospective buyer of the Model 3 figure out whether he or she will be eligible to get the $7,500 incentive? We’re gonna have to run some numbers.
What Is This Incentive Thing Anyway?
The “Plug-In Electric Drive Vehicle Credit (IRC 30D)” is a federal tax incentive program in the United States designed to promote the adoption of EVs. Benefits of EVs over standard combustion engine cars include lower net emissions, zero direct emissions (no tailpipe), and a reduced dependency on foreign oil. The amount of the tax credit starts at $2,500 and goes up, depending on the size of the battery in the car. The most popular EVs in the US today — Chevy Volt, Nissan Leaf, BMW i3, Tesla Model S, Tesla Model X, and the upcoming Chevy Bolt and Tesla Model 3 — all have large enough batteries to qualify for the maximum $7,500 tax credit.
It’s important to note that it is a tax credit, not a point-of-sale rebate. In other words, you will still have to pay $35,000 (or more) up front for your Model 3. But, if the tax credit is still available for Tesla cars at the time you take delivery of your Model 3, then you can deduct up to $7,500 from your income tax liability that year. In other words, if you normally pay $20,000 in federal income taxes, you will only pay $12,500 in federal tax for the year you buy your Model 3 ($20,000 minues $7,500). Depending on how you manage your tax payments (how much of your taxes are withheld in each paycheck), you will either need to write a smaller check at tax time, or will get a larger refund from the IRS. You can read more about this incentive program here.
Will I Qualify For The Full Credit?
If your federal tax liability in the year you buy the car is greater than $7,500, then you can deduct the full $7,500 from your taxes. If your tax liability is less than $7,500, then your tax burden will be decreased to zero for that year. In other words, if you only owe $5,000 in federal taxes (before the tax credit), you will pay $0 that year, but you won’t get an additional bonus of $2,500. As a starting point, single earners who make around $55,000 a year (gross income) and married households earning around $70,000 a year could pay enough federal taxes to qualify for the full amount of the tax credit. But this varies significantly depending on your other deductions for things like medical expenses, property taxes, and how many rugrats you have running around the house. There are income tax calculators that can help estimate your tax liability. But the best way to figure out how much tax you pay is to look at your tax return for last year (1040, 1040A, or 1040EZ) and look for the line that says “total tax.” If that number is greater than $7,500, then you would be eligible for the full credit. And if your income and tax liability situation goes up over time or stays roughly the same, then you should qualify for it in the future as well.
When Does The EV Federal Tax Credit Expire?
The current federal incentive program does not have an expiration date, but it is designed to give all carmakers an equal incentive to build and sell plug-in electric vehicles for a limited amount of time. Whenever a manufacturer reaches 200,000 PEV unit sales in the United States, the tax credit goes into its “phaseout” period, which lasts somewhere between 15 months plus a day or 18 months minus a day. Huh?
It can be a little confusing, but the way it works is that whenever a manufacturer hits car #200,000 sold in the United States, any EV that company sells in the US during that calendar quarter and the following quarter qualify for the full tax credit. So if Tesla delivers its 200,000th car on July 1, 2018, then all of the cars its sells in the United States from July 1 to September 30 (Q3) and from October 1 to December 31 (Q4) qualify for the full tax credit. After that, for the next six months (two quarters) the credit decreases to 50% ($3,750); then decreases to 25% ($1,875) for the following six months.
Do Other Teslas Count Toward The 200,000?
The way the incentive program is currently structured, all qualifying cars made by a manufacturer count toward the 200,000 limit. This gives all manufacturers a level playing field. And since Tesla only makes EVs, all of Tesla’s cars sold in the United States since 2010 count toward the limit: Roadsters (sold after January 1, 2010), Model S, Model X, and Model 3 sales all count toward that limit.
When Will Tesla Hit The 200,000 Limit?
This is an important question, but also one that is hard to answer precisely as it’s based on things that haven’t happened yet. Tesla doesn’t officially report how many cars it sells in the US, but there are clues about global distribution that can inform our estimates. Also, Tesla offers projections about future sales that can help us to estimate how long it will take to reach that 200,000 car milestone. One great site for US EV delivery estimates that has been covering these for several years is InsideEVs. According to its current estimates, Tesla has sold approximately 73,000 EVs in the United States as of last month (March 31, 2016). So, we’re already over a third of the way toward that 200,000 vehicle milestone. Check out its running list of EV sales in the United States (updated monthly).
In 2015, about half of Tesla’s 50,580 vehicles sold globally were delivered to US buyers. We’ll assume that same 50% US delivery mix holds true moving forward. Tesla’s projections for 2016 are for a total of 80,000–90,000 cars sold globally. Although Tesla came in at the low end of its projections last year, we’ll split the difference and assume 85,000 global deliveries in 2016, half of which go to the United States (42,500). Tesla has delivered about 8,790 Model S and Model X cars in Q1, so that leaves about 33,710 US deliveries for the remainder of 2016.
Tesla has not published any official projections for 2017 sales figures, but if we go by Elon’s comments in the Q3 2014 conference call, Elon projected “50% growth” year over year for the foreseeable future. If we assume that this still applies into 2017, then we could be looking at Tesla’s global EV deliveries being as high as 120,000 to 127,500 vehicles in 2017. This is a bold goal, considering that number would likely only include Model S and Model X cars, with just a handful of Model 3s delivered in late 2017. Tesla is unlikely to scale up production of the Model 3 before early or even mid-2018. But as sort of a worst case scenario (or best case, depending on how you look at it), let’s estimate 127,500 in global unit EV sales in 2017, 50% of which go to the US market (63,750). Based on these estimates, Tesla should still be well below the 200,000 US delivery count at the beginning of 2018. Our current projection is somewhere around 165,000 to 175,000 Tesla EVs in the US by January 1, 2018.
If Tesla manages to deliver a few (or a few hundred) Model 3s in 2017, then ramps up production of the Model 3 in early to mid 2018, then they will likely hit the 200,000 figure in Q2 or Q3 of 2018. And that is when the clock starts ticking. Assuming that Tesla delivers car number 200,000 in the United States early in Q3 (July 1, 2018), then all Teslas delivered in the US in Q3 2018 and Q4 2018 will qualify for the full $7,500 federal tax incentive. Based on that same projection, all Teslas delivered in the US in the first half of 2019 would qualify for 50% of the incentive ($3,750) and all cars delivered in the US in the second half of 2019 would qualify for 25% ($1,875). That could be tens of thousands (if not hundreds of thousands) of Tesla cars — including Model 3s — that would qualify for a full or partial tax credit.
How Can I Make Sure That I Will Get The Federal Tax Credit?
Nothing is certain in this world but death and taxes. And those annoying songs that get stuck in your head all day like an earworm (“Never Gonna Give You Up!” — good luck with that one…). But there are some things you can do in order to make it more likely to get the tax credit on your Model 3. First of all: make a reservation! Tesla already has close to 400,000 reservations for the Model 3 in the queue (in just two weeks). If the geographic breakdown is similar to historical sales, that should be around 200,000 vehicle reservations for the United States alone. And that number is growing. Also, Tesla has stated that it will give priority delivery to Tesla and SpaceX employees as well as current owners of a Tesla Roadster, Model S, or Model X. And delivery priority is being given to California and other West Coast residents (this will make it easier to shake out any early issues with the car, close to Tesla’s home base).
But all is not lost! Tesla’s cars are not delivered in the exact reservation order. Tesla normally delivers the highest-optioned cars first, in order to maximize revenue early on, when production is limited. This is a common practice. When I bought my first hybrid (a 2006 Highlander Hybrid) back in 2005, I had to wait several months for it (seems to be a pattern for me). I was told that only the highest-optioned “Limited” model would ship first. Lower spec’ed cars were delivered several months later. So if you are on the fence about whether to get a stripped-down base model or one of the extended-range performance models with Autopilot and some extra goodies, then go for the higher-optioned model. If history is any guide, those cars will begin shipping first.
Also, it’s important to note that the date/time of your reservation does not determine when you get your car. It only dictates when you will be invited to configure your car and finalize your order. With the Model X, which only had around 30,000 to 35,000 reservations, invitations to configure one’s car went out in large blocks. Someone who reserved their car in 2014 may have been invited to configure just a week after someone who had reserved the car a full year earlier. The Model 3 reservation count is much higher (and continues to grow) but we expect something similar to happen with configuration invitations.
Your order in the production queue is determined by when you configure your car and confirm your order. Once you select all your options and click the “Order” button, you will probably get a week to make any changes, after which the order is locked in. This is how it worked with Model X. After that week, the order is confirmed and your deposit is no longer refundable. Any changes to the configuration after confirmation normally incur a change fee (typically $500). Once your order is confirmed and in the queue, it will be prioritized based on your configuration and your location (West Coast orders shipping first). Also, priority delivery will be given to Tesla and SpaceX employees and current Tesla owners. But we feel pretty strongly that even non-owners/non-employees who lock in a highly optioned configuration early are likely to get their cars delivered before owners and employees who confirm base models. We may not know complete details until much closer to production.
What Will Tesla Do To Make Sure I Get My Tax Credit
Tesla has been clear from the beginning when talking about the price of the Model 3: it will start at $35,000 before incentives. They do this for two reasons: a) there is no guarantee that the tax credit will still exist when Model 3 enters production, and b) Tesla believes that the Model 3 will offer excellent value for $35,000 particularly when compared to the competition. But that said, Tesla recognizes the fact that tax incentives are extremely helpful in promoting wide-scale EV adoption. And it’s likely that Elon and others at Tesla will make their best effort to make as many cars as possible that are eligible for the tax incentive. How can they do that? The simplest way is to try to time the sale of car #200,000 in the US to the start of a quarter (January 1, April 1, July 1, or October 1).
Delivering car #200,000 at the beginning of a quarter would give them nearly 6 full months to produce and sell cars that are eligible for the full tax credit. To do this, Tesla might temporarily shift deliveries outside of the US for a time until a new quarter starts, then deliver car #200,000 in the US at the start of a quarter and ramp up production of the Model 3 in earnest. Do we think Tesla will do this? Yes, we do, based on a couple of tweets from Tesla CEO Elon Musk shortly after the Model 3 was unveiled.
When asked whether Tesla might time the delivery of car #200,000 to the beginning of a quarter, Musk’s reply was, “We always try to maximize customer happiness even if that means a revenue shortfall in a quarter. Loyalty begets loyalty.” When someone else commented that he believed it was unfair to give delivery priority to current owners, as that would make it less likely that new customers of the Model 3 would be able to get the tax break, Musk replied, “Our production ramp plan should enable large numbers of non X/S customers to receive the credit.” So from these hints, we do believe Tesla will make an effort to deliver as many incentive-eligible Model 3s as is feasible.
Will Tesla Let Me Know If My Tax Credit Is In Danger?
In the Model 3 Reservation FAQ, Tesla says, “We are committed to providing you with the most current information about incentives at the time of purchase, we’ll do the same when it’s time for confirming your Model 3 order.”
In other words, Tesla will inform customers and prospective customers about the estimated expiration of these credits before asking said customers to confirm their orders. With the Model 3, reservation holders are entitled to cancel their orders and get a full refund for any reason at any time before confirming the order. Usually, with new cars, Tesla opens up the online design studio a few weeks to a few months before deliveries are scheduled to begin. At that point, Tesla should have a better idea as to when they will hit the 200,000 milestone in the United States and will inform customers accordingly. You should have a pretty good idea at order confirmation time whether you’ll be able to take advantage of the tax credit or not.
How Many Model 3 Buyers Will Get the Credit?
The total number of buyers of the Model 3 who will be eligible for the federal tax credit is hard to know, as it is based on many as-yet-unknown factors. As recently as last year, Musk confirmed his goal to reach 500,000 global car deliveries a year by 2020. And while that is still possible, it would represent a huge increase in production and delivery speed in fairly short order. A Bloomberg article from last August laid out a potential path to 500,000 annual deliveries in 2020. The author’s projection for 2017 is for Tesla to make and sell over 150,000 vehicles globally, growing to 200,000 vehicles in 2018 and 300,000 in 2019. We might assume that Model 3 would be roughly half the mix in 2018 and 70% of the mix in 2019. We may also assume that 75% of combined first-year and second-year Model 3 sales will be in the United States (based on what Musk has said about Model 3 delivery priorities). If we also assume that Tesla hits the 200,000 milestone in the US on July 1, 2018, then we’d be looking at around 75,000 Model 3 buyers in the US being eligible for the full credit and over 150,000 Model 3 buyers being eligible for a partial credit.
But that’s a whole lot of “IFs.” Many factors between now and when the Model 3 goes into production (and beyond) could change these projections. At this point, we’re not ready to make any definitive projections about how many Model 3 buyers will be eligible for the tax credit. However, judging by the strides the company has made to date, I wouldn’t bet against the Model 3 launch being a success and the number of incentive-eligible cars being quite significant.
Your Mileage May Vary!
Many things could happen which would change these estimates. Tesla may deliver more (or fewer) cars in the United State in 2016 and 2017. This would change the date that it reaches the 200,000 milestone. Tesla may miss its 2017/18 delivery target for Model 3s. And this could reduce the number of Model 3 buyers who qualify for the rebate. Also, the current federal incentive program may change, for better or for worse, before the Model 3 comes out. (Editor’s Note: there’s already a push to increase the manufacturer limit, especially for clear leaders like Tesla, Nissan, and GM — two of which are American companies.)
One additional thing to consider is that several states provide their own incentives to get their residents to buy an EV. In Colorado, EV incentives are as high as $6,000 per car. In California, it’s $2,500 (subject to income restrictions). New York State announced earlier this month that it too will offer a tax credit of up to $2,000 for EV purchase, and this is expected to go into effect before the first Model 3 ships. If you’re considering an EV, it’s always a good idea to research the incentives available where you live, as these may also help to offset the cost of an EV purchase.
TL;DR: Based on current projections, the federal tax credit of $7,500 is likely to be available to thousands of Tesla Model 3 buyers. The best way to take advantage of it is to reserve one now, confirm your order as soon as you are invited to, and option it up as much as you like and can afford to. Also, move to California and get a job with Tesla. (: But even if those last two options aren’t feasible, chances are still excellent that tens of thousands of Model 3 buyers will get to take advantage of this program and help usher in the EV revolution. And one of those people may very well be you.
More details on the Tesla Model 3 reservation program are available on the Tesla website.