Now is a great time to take advantage of incentives that allow up to $7,500 off new Toyota electric vehicles. For the 2021 tax year, the Federal government will issue EV tax credits for plug-in hybrid (PHEV) and all-electric (EV) models. 

The Biden administration hopes to see half of the vehicles on American roadways attain zero emissions by 2030. The ambitious goal includes cooperation from industry leaders such as Toyota, which offers an EV lineup including the Prius and RAV4.

The 2021 federal tax credit

According to the Internal Revenue Service, the new tax credit pertains to “Qualified Plug-In Electric Drive Motor Vehicles.” Any eligible passenger vehicle or light truck purchased after December 31, 2009, will receive a $2,500 tax credit.

Owners of a “vehicle which draws propulsion energy from a battery with at least 5 kilowatt-hours of capacity” will receive an additional tax credit of $417. For every “kilowatt-hour of battery capacity in excess of 5 kilowatt-hours,” another $417 will be added to the total amount. The total allowable amount of the credit is $7,500.

Toyota EV models eligible for the tax credit 

The 2021 Toyota RAV4 Prime PHEV produces a total combined output of 302 hp, compared to the 219 hp produced by the hybrid. A larger 18.1 kWh battery allows the Prime to run for 42 miles on electricity before it switches over to the engine, for a total driving range of 600 miles.

The EPA estimated rating on the RAV4 Prime is 105/84/94 mpg-e. The 2021 Toyota RAV4 Prime PHEV is eligible for the maximum tax credit allowance of $7,500. With an MSRP of $38,350, MotorTrend says the SUV is “the best hybrid Toyota has built to date.”

The Toyota RAV4 EV is also eligible for a $7,500 tax credit for the 2012 to 2014 model years. The budget-friendly compact SUV has an average retail price between $10,050 and $13,475. With a swing-out rear gate, third-row seat, and rare V6 engine, a used 2012 RAV4 offers considerable value.

According to the U.S. Department of Energy, in addition to federal tax credits, EV owners may also take advantage of local or state incentives. The 2017 to 2021 Prius Prime PHEV is eligible for a $4,502 tax credit, and model years 2012 to 2015 are eligible for $2,500. Car and Driver say the vehicle is “great for fuel-conscious shoppers” but calls it “as exciting as a hospital waiting room.”

How to take advantage of the tax credit

The $7,500 tax credit for alternative-energy cars is not an upfront discount on the vehicle’s selling price. Market Watch explains the credit reduces tax liability, saying that it is a “credit against the federal income taxes you owe in the year in which you buy the car.”

The IRS does not allow EV owners to take credit on certain models. Only the first 200,000 vehicles sold in the United States are eligible from specific manufacturers. The tax credit is no longer available once the quota is reached. According to Electrek, Tesla exceeded this limit several years ago, and current owners no longer qualify for the tax credit.

RoadShow reports the Affordable EVs for Working Families Act may enable potential EV owners to take an additional $2,500 tax credit. If passed, the legislation will allow the credit for a used EV. The vehicle would have to be at least two years old with a retail price of less than $25,000 to qualify. It is also possible the current EV tax credit may increase to $12,500, but that has not yet been approved.