For anyone on the fence about the new wave of electric cars that have been hitting the market (and will only continue to expand over the next few years) legislation regarding tax credits might help you make up your mind.

In an attempt to boost sales and promote a more environmentally friendly initiative (and perhaps in part alleviate the nation’s dependency on fossil fuels and their impending disappearance) the US Government has imposed a series of tax credits for those purchasing and using electric vehicles.

In part, the system sounds too good to be true.  And fortunately, there isn’t much of a catch.

First and foremost, what accompanies the purchasing of an electric vehicle is a tax credit.  A tax credit is different than a tax break or a tax deduction, which are three terms used interchangeably (and incorrectly) in American vernacular.

The tax credit serves as a dollar-for-dollar substitution for owed taxes.  This differentiates from a tax break because it doesn’t alleviate your currently owed taxes.  Similarly, it’s also not a tax deduction, because a deduction only lowers the percentage of taxes owed on any particular facet.

The tax credit is ultimately a far better deal.  With a tax credit you simply don’t have to pay a portion of the taxes you would have otherwise owed.

In essence, by purchasing an electric vehicle you’ll get a (potentially) large chunk of your required tax payment taken care of.

These regulations have been in effect since the end of 2005, but given the lack of commercial electric vehicles it hasn’t been very prominent.

However, 2010 saw the development of such cars as the Nissan Leaf and Chevy Volt (among others) which makes the governmental regulation more relevant.

First off, there’s a long list of what qualifies as an electric car.  You’d think that might be an easy call to make (ultimately, it is) but for the sake of legislation it has to be mapped out.  If you’ve purchased an electric car or are contemplating purchasing one, don’t make a silly mistake—consult the list first.  There’s high odds what you’re buying is going to be on there but you definitely don’t want to drop the $20K or more on a vehicle that’s not going to give you the appropriate tax break.

Secondly, there’s a bunch of regulations regarding when you purchase the car and when you can claim it on your taxes.  In short, the car you purchase won’t be tax eligible until the following calendar year.  And the quarter in which you purchase it makes all the difference.

The legislation is clearly designed to encourage the purchasing of new electric cars.  For example, you get the biggest tax break when you purchase a car in the third or fourth quarter of a fiscal year.  It doesn’t matter when you actually end up with the car in your possession, it matters entirely when you purchase it.

Furthermore, if you purchase at the beginning of the year (hence purchasing the previous year’s model) the tax credit you get is reduced to 25%.  Clearly, this discourages purchasing older models—even only a year old.

Although something is better than nothing—and when it comes to tax credits, many of them extend past the previous year’s purchases. As mentioned, when you purchase in the first or second quarter of a year your credit decreases.  But if you’ve purchased a car, you may as well get the tax credit for it.

The same applies to purchasing cars earlier than a year before.  Anything purchased between the end of 2005 and the end of 2010 is, in some capacity, eligible for a tax credit, but the circumstances vary wildly and should be checked out thoroughly.

In short, your biggest tax break is going to come from purchasing a brand new model in the third or fourth quarter, when the new lines are introduced to the public.  If you don’t receive the car for another six months it’s still relevant on your tax statement due April 15^th of the following year.