The current federal electric vehicle tax credit system was overhauled after the Inflation Reduction Act of 2022 passed through Congress and was approved by the president. These changes will make the tax credit available to purchasers of a few electric cars that were previously ineligible. As a result, many other buyers are no longer able to obtain credit. First-time buyers of used electric vehicles can now take advantage of a federal EV tax credit.
Check out the IRA’s summary of changes to the electric vehicle tax credit and what you need to know about the federal tax incentives.
A tax credit for electric vehicles
Taxpayers buying clean, plug-in electric or plug-in hybrid vehicles can take advantage of the electric vehicle tax credit, also known as the EV credit. Depending on the vehicle’s weight, how many cars the manufacturer has sold, and whether you own it, the non-refundable credit will range from $2,500 to $7,500 for the tax year 2022 (taxes filed in 2023).
It is estimated that the majority of the changes to the credit will begin taking effect in 2023 and last until 2032 due to the Inflation Reduction Act (IRA). Manufacturers are required to meet new manufacturing requirements, income thresholds are raised, and car types are now eligible for subsidy.
With the new credit, new EVs will be eligible for a maximum credit of $7,500, and used EVs will be eligible for a maximum credit of $4,000, limited to 30% of the sale price. In March 2023, the Treasury Department will issue further guidance on one of the new requirements – the battery and critical mineral requirements.
What is the electric vehicle tax credit?
You will still have to follow the old rules if you purchased an EV in 2022 and plan to claim it on your tax return in 2023. Depending on the car’s battery capacity, the credit is worth $2,500 to $7,500 in the 2022 tax year. As soon as a manufacturer sells 200,000 qualifying vehicles, the credits are reduced and eventually phased out. Therefore, Tesla and GM’s EVs are ineligible.
In order to drive a car, you must own it. Cars that have been used or leased are not eligible.
There must be no more than 14,000 pounds of weight on the car.
Your tax bill will be lowered to zero by the credit, but you won’t receive a refund as a result.
Here’s something to keep an eye out for
In the IRA, the “final assembly” requirement was introduced. For eligible vehicles, they must have been assembled in North America between August 16, 2022, and December 31, 2022.
The US Department of Energy has compiled a list of cars that are likely to qualify through the end of 2022.
You may be able to claim this credit without having to meet this new final assembly requirement if you already entered into a “binding written contract” to purchase an EV before August 16, 2022, and expect the car to be delivered afterwards. In any case, you should consult with a tax expert and the dealership before making any purchases.
Claiming the credit
When filing their federal income taxes, taxpayers can claim the credit by filing Form 8936.
Electric vehicle tax credit: 2023 through 2032
With the exception of the critical mineral and battery requirements, the changes to the clean vehicle tax credit listed below will take effect in January 2023. As a result, Treasury Department guidance will be issued on the provision, and its enforcement will ultimately be delayed until March 2023.
An overview of the revamped tax credit for clean vehicles purchased in 2023 follows.
EV tax credits have been extended, which is by far the most significant change. The credit has been extended for another nine-year period, allowing taxpayers with eligible vehicles to take advantage of it from 2023 to 2032. There is a limit of one credit per vehicle.
Manufacture cap lifted
A number of manufacturing limits in the IRA have been adjusted to make it easier to qualify for credit if you buy a car from a manufacturer with over 200,000 qualifying vehicles, such as Tesla. There will be a lifting of manufacturing caps in 2023.
Buying used cars is now possible
Used cars were excluded from the older version of the EV tax credit, which caused controversy. This is remedied by the IRA. Taxpayers can receive a credit of up to $4,000 on used EV purchases beginning in 2023, limited to 30% of the purchase price.
Other qualifications include:
- Fuel cells or plug-in electric cars must be used.
- A vehicle can only be transferred for the first time.
- There must be a minimum purchase price of $25,000 for the car.
- At least two years must have passed from the date the model of the car was purchased.
- It is only possible to claim credit once every three years.
Limits on prices
Prices for eligible vehicles are also capped under the IRA. To qualify, vans, SUVs and pickup trucks need to have an MSRP of $80,000 or less by 2023. There is a $55,000 cap on other vehicles, such as sedans and passenger cars. Used vehicles are subject to a $25,000 price cap.
IRS definition of MSRP
It is the base retail price provided by the manufacturer plus the retail price of each accessory or optional piece of equipment physically present on the car at the time of delivery to the dealer. Taxes and other fees added by the dealer are not included in MSRP.
Cap on income eligibility
Taxpayers are also required to meet income limits in order to qualify for the new credit, along with price caps on cars.
|Tax-filing status||Modified adjusted gross income|
|Head of household||$225,000|
|Married, filing jointly||$300,000.|
|Married, filing separately||$150,000|
|Tax-filing status||Modified adjusted gross income|
|Head of household||$112,500|
|Married, filing jointly||$150,000|
|Married, filing separately||$75,000|
In the event your income prevents you from qualifying, there are several tax strategies you can use to reduce your income, such as maxing out your 401(k) or contributing to an HSA or FSA.
Prerequisites for final assembly of an electric vehicle
The final assembly of vehicles must have taken place in North America to qualify for the new credit. The National Highway Traffic Safety Administration uses VINs, or vehicle identification numbers, to track a car’s final assembly process.
Requirements for new batteries and sourcing
There will be further guidance from the Treasury Department on this requirement. It will not be enforced until March.
There are two requirements for the new credit worth up to $7,500, which each account for half of the amount.
Specifications for batteries:
At least a certain percentage of the vehicle’s battery (up to $3,750) should be assembled or manufactured within North America in order to qualify for the battery portion. Percentage thresholds are as follows:
- 2023: 50%
- 2024: 60%
- 2025: 60%
- 2026: 70%
- 2027: 80%
- 2028: 90%
- 2029 through 2032: 100%
A critical mineral requirement is:
The remaining $3,750 credit will be given to cars that meet a “critical mineral requirement.” That is, a certain percentage of the critical minerals in the battery must be sourced or processed in the US or in a country with which the US has a free-trade agreement. In terms of percentage thresholds, there will be the following:
- 2023: 40%
- 2024: 50%
- 2025: 60%
- 2026: 70%
- 2027 through 2032: 80%
Vehicles will no longer be able to source battery parts from foreign countries of concern (such as China) beginning in 2024. Beginning in 2025, EVs cannot contain critical minerals sourced from foreign countries.
Credit flexibility for an electric vehicle
In 2024, taxpayers will be able to transfer the credit to a dealer directly at the point of sale, thereby lowering the vehicle’s price by the corresponding credit amount. Foe those interested in buying EVs but are wary of high sticker prices, this is great. In the coming months, the IRS and the Department of Treasury will provide further guidance on the transfer of the credit.
Vehicles with tax credits for 2023
It’s difficult to say with absolute certainty since the Treasury Department won’t release final guidance until March 2023. Certain cars that were previously ineligible for a tax credit in 2023 but now qualify for one from January to March 2023 if they meet sourcing requirements.
What is the safest option? According to manufacturer information submitted to the IRS, the following two lists of new and used clean vehicles are likely to qualify. New additions will be periodically made to the lists, according to the IRS.
- New clean vehicles
- Used clean vehicles
Information needed from the seller
Be sure you have the documents you need to claim the credit on your taxes before you leave a dealership. Taxpayers must receive a report with certain details about the vehicle from their sellers within 30 days of the vehicle’s purchase with:
- The seller’s name and taxpayer identification number (TIN)
- Taxpayer’s name and TIN
- The date and price of the sale
- Checking if the vehicle is eligible for maximum tax credit
- Vehicle identification number (VIN) of a clean vehicle
- Battery capacity of a clean vehicle
- The taxpayer must prove that they used the vehicle originally
- Statement of declaration under penalty of perjury from the seller
Incentives and rebates for an electric vehicle
The emphasis on credits isn’t the only incentive available. There are also local and state incentives. The Clean Air Vehicles Program, for example, permits the use of carpool lanes by electric vehicles. In addition to the federal tax credit, New Yorkers may qualify for a state-level rebate of up to $2,000 as well.
Ensure you are aware of restrictions on applying for multiple incentives. There are some states that do not allow you to double-dip or claim a federal rebate on top of a state rebate.
It’s exciting to hear that the clean vehicle credit has been expanded, but it’s still complicated and nuanced – particularly with the murkiness surrounding the new sourcing requirements. Consider consulting a qualified tax professional before signing if you’re unsure about your eligibility or want guidance for your specific situation.