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IRS Issues $7,500 Tax Credit For RAV4 Prime Plug-In Hybrid

IRS Issues $7,500 Tax Credit For RAV4 Prime Plug-In Hybrid

The government attempts to modify the behavior of taxpayers by applying or reducing taxes on certain activities. Alcohol and cigarettes are viewed as health risks, so the government adds excessive taxes to them to try to discourage their use. On the energy front, the government is in favor of people buying hybrid vehicles as part of the effort to reduce our nation’s oil dependence. To facilitate this policy, the government is giving people who buy hybrids a huge tax windfall.


IRS gives you Plug-In Electric Drive Motor Vehicle Tax Credit based on the type of vehicle. You need to check if your hybrid vehicle is eligible for that credit (up to $7,500) for that particular tax year.

To understand the windfall, you need to understand the difference between a tax deduction and tax credit. A deduction is something you reduce from your gross income. A $1,000 deduction may save you $200 to $400 depending on your tax bill. A tax deduction is a positive thing, but pails in comparison to a tax credit.

A tax credit is not deducted from your gross income. It is deducted directly from the amount of tax you owe. Using the previous example, you would figure out how much tax you owe for the year and then deduct $1,000 from it. Put another way, the tax credit represents a dollar for dollar savings on the actual amount of taxes you owe, a huge savings.

To promote hybrid cars, the federal government lets purchasers claim a tax credit amount set by the IRS. The credit can be as high as $7,500 but is often a bit less. The IRS has just released technical guidance indicating it will allow taxpayers to claim a tax credit of $7,500 if they purchase a RAV4 Prime Plug-In Hybrid in 2021. Or you will get a $4,502 tax credit if you purchase Prius Prime Plug-in Hybrid in 2021.

To see if your hybrid vehicle can have a tax credit you can visit the IRS website here.