Electric Vehicle Federal Tax Credit: Explained

Electric vehicle tax credits

You may be wondering what is an electric car federal tax credit. The US government provides people incentives to switch from gas to electric cars and will give you up to a $7,500 tax credit to make the change. This article will cover why there is an electric car tax credit, who qualifies for it, and how it works.

New Requirements Effective April 18, 2023
If you take possession of a new clean vehicle on or after April 18, 2023, it must meet critical mineral and battery component requirements to qualify for the credit. This applies even if you bought the vehicle before April 18. Find details in Q6 under Topic A in the Fact Sheet

IRS. (2023). Credits for New Clean Vehicles Purchased in 2023 or After. Retrieved from https://www.irs.gov/credits-deductions/credits-for-new-clean-vehicles-purchased-in-2023-or-after

Why a Tax Credit for Electric Cars?

With all the talk of climate change and countries needing to curb their emissions, switching from gas to an electric car can help. Transportation contributes  29% of total emissions, with cars being a leading contributor. According to the US Department of Energy, the average gas car produces 11,435 pounds of carbon emissions each year. In contrast, the average electric car produces only  3,774 pounds of emissions per year. By providing an electric car federal tax credit, the government is curbing carbon emissions, reducing our dependence on foreign oil, and helping fight climate change.

*EV Federal Tax Credit Updates Following 2022 Inflation Reduction Act

The president signed the Inflation Reduction Act (IRA) in August, and with it came many changes to the federal tax credits.

The new credit will allow for a maximum of $7,500 for new EVs and up to $4,000, limited to 30% of the sale price, for used EVs. New qualifications take effect on August 16 of, 2022 and apply to electric vehicles purchased after August 16, 2022.

A few key restrictions and key items that we will cover:

  • US final assembly requirement
  • Battery composition source requirements
  • Income limits for individuals and couples filing jointly
  • MSRP cap for EVs based on size and new vs used

New incentive now denotes “Clean Vehicles”

An important item to note is this new bill changes today’s “plug-in vehicles” or electric vehicle credit to a more broad “clean vehicles” credit. This could include fuel-cell electrics and future alternative fuels that might compete with battery-electric power. 

Lifted manufacturing cap

The IRA also made several adjustments to manufacturing limits that previously hampered eligibility for the credit if you bought a car from a manufacturer, such as Tesla, that had sold more than 200,000 qualifying vehicles. Beginning in 2023, manufacturing caps will be lifted, allowing more EVs to qualify than in previous years (Chevrolet and Tesla).

More changes are coming starting in 2023

Additional provisions will go into effect on January 1, 2023. Most changes impacted by IRA begin taking effect in 2023 and last until 2032. Also, if you entered into a written binding contract to purchase a new qualifying vehicle before August 16, 2022, see the IRS publication for further guidance.

Who Qualifies for the Tax Credit?

If you’re considering buying a new plug-in electric vehicle or fuel cell electric vehicle, you may be eligible for a tax credit of up to $7,500 under Internal Revenue Code Section 30D. The credit is available to individuals and businesses, as long as the vehicle is purchased for personal use and primarily used within the United States. The rules for this credit have recently changed, affecting vehicles purchased from 2023 to 2032. To qualify, your modified adjusted gross income must not exceed $300,000 for married couples filing jointly, $225,000 for heads of households, or $150,000 for all other filers. Keep in mind that the credit is nonrefundable, meaning you can’t receive more than you owe in taxes, and any excess credit can’t be applied to future tax years.

New Guidelines for Vehicles Placed in Service After April 18, 2023

In order to be eligible for a credit, vehicles must satisfy all of the previously mentioned criteria as well as comply with the newly established standards for critical minerals and battery components.

  • If the vehicle satisfies the critical minerals requirement, the cost would be $3,750.
  • If the vehicle meets only the battery components requirement, the cost will be $3,750.
  • If the vehicle fulfills both criteria, the amount awarded is $7,500.

If a vehicle fails to meet either of the requirements, it will not be eligible for a credit.

For Vehicles Purchased Prior to August 17, 2022

To qualify for the electric tax credit, you need to meet the following criteria.

  • Purchased a car or truck that weighs less than 14,000 pounds and draws energy from a battery of at least four kilowatt-hours.
  • You must have purchased a new electric car in or after 2010 and be the original owner.
  • Only the first 200,000 electric vehicles sold by manufacturers will qualify for a rebate.

Electric car federal tax credits can range from $7,500 to $2,500. The closer a manufacturer gets to selling 200,000 electric cars, the smaller the tax credit becomes. You can get the latest availability on electric car federal tax credits by visiting the Department of Energy website or visiting Electric Driver. Beyond tax credits, you should also look into electric car rebates and tax credits from your state and utilities.

For Vehicles Purchased After August 16, 2022

The new bill includes income limits to qualify for the federal EV incentive, and the limits are different for new and used EVs. The income limit is based on Modified Adjusted Gross Income (MAGI).

New Clean/Electric Vehicles:

  • For those filing as individuals, MAGI must not exceed $150,000
  • For couple filing jointly, combined MAGI must not exceed $300,000
  • Head of household filers MAGI must not exceed $225,000

Used Clean/Electric Vehicles:

  • For individual filers, MAGI must not exceed $75,000
  • For couples filing jointly, combined MAGI must not exceed $150,000
  • Head of household filers MAGI must not exceed $112,500

*Additional qualifications for Used EVs are explained below.

What Electric Vehicles Qualify for the Federal Tax Credit?

For Vehicles Purchased Prior to August 17, 2022

To find what vehicles are, get an electric car federal tax credit; the Energy Department has a list of eligible vehicles. Also, remember that carmakers selling over 200,000 electric cars do not qualify for the tax credit. For example, if you buy a Tesla, you do not get any federal tax credits. Instead, look to newer electric car makers or traditional carmakers starting to make electric cars like Ford. Electric Driver lists which vehicles are eligible for the electric car federal tax credit.

For Vehicles Purchased After August 16, 2022

New Clean Vehicles:

  • US final assembly requirement
    • Only new electric vehicles where final assembly occurred in North America qualify for the federal tax credit.
    • The Department of Energy has provided a list of vehicle models that may meet these criteria, but a VIN decoder is required to know where the vehicle was manufactured, as some vehicles are assembled in multiple locations.
  • MSRP cap for EVs based on size and new vs. used
    • Eligible cars cannot have an MSRP exceeding $55,000.
    • Eligible trucks, vans, and SUVs cannot have an MSRP exceeding $80,000.
    • As of January 2023, the IRS has put out a list of qualified electric vehicles. Furthermore, in March 2023, there will be possible updates to the tax credit rules.
These additional qualifications begin to take effect in 2023 for new Clean Vehicles:
  • Battery requirements (takes effect starting 2023)
    • To be eligible for the battery portion of the credit (up to $3,750), a certain percentage of the vehicle’s battery must be assembled or manufactured within North America.
    • Thresholds start at 50% in 2023 and increase by 10% each year until it reaches 100% in 2029. So, vehicles will require 100% battery composition from 2029 through the end of the incentive program ending in 2032.
  • Critical minerals requirements (takes effect starting 2023)
    • Starting in 2023, cars will also need to meet a “critical minerals requirement” to receive the remaining $3,750 portion of the credit. A certain percentage of critical minerals (ex., lithium) in the car’s battery must be extracted or processed within the U.S. or within a country with whom the U.S. has a free-trade agreement.
    • Thresholds start at 40% in 2023 and increase by 10% each year until it reaches 80% in 2027. This is the max percentage threshold throughout the incentive program ending in 2032.
  • Foreign countries of concern (takes effect starting 2024)
    • A “foreign entity of concern” is defined as a state sponsoring terrorism or countries blocked by the Treasury Department’s Office of Foreign Assets Control. China is on the list.
    • Starting in 2024, vehicles may not source battery parts from a foreign country of concern to be eligible.
    • Starting in 2025, EVs cannot contain any critical minerals from a foreign country of concern to be eligible.

Used Clean Vehicles:

  • Tax credit is equal to 30% of the vehicle’s price, with a credit amount not to exceed $4,000.
  • Eligible used vehicles must be purchased from a dealer
  • Must be priced at $25,000 or less
  • Must be purchased by an individual (no businesses)
  • Must be at least two years old at the time of purchase
  • Credit can only be claimed once every three years
  • Used clean vehicles are not required to meet the new vehicles’ country-of-origin requirements.
  • Income limits (see above)

How Do I Claim My Clean Vehicle Tax Credit?

To claim your electric car federal tax credit, you will need to fill out IRS form 8936 when you file your taxes. Typically, you would file for the electric car tax credit the same year you bought your electric car. However, in some cases, you may be able to amend your tax return and file it later. You have up to three years to file for the electric car federal tax credit. You can learn more about the electric car federal tax credit eligibility on the IRS website. 

Beginning in 2024, taxpayers will have the option to transfer the credit to the dealer at the time of purchase to directly lower the price of the vehicle by the corresponding credit amount — this is huge news for folks who may want to invest in an EV but have been dissuaded by high sticker prices.

Other Electric Vehicle Incentives 

Beyond federal tax credits, there are other incentives available for electric vehicles. For example, back in 2018, when I bought my electric car, my local electric utility provided electric car incentives. Specifically, the electric utility provider at the time offered a $500 electric car credit and another $500 rebate for buying an electric car charger. Keep in mind that offers change, so you need to research what rebates and incentives are available in your area. You can learn more about state and local rebates by visiting the Electric Driver EV incentives page as well as your local electricity provider.

Electric vehicles can also save you time, money and reduce harmful carbon emissions. To learn more about how you can benefit from owning an electric car, visit Electric Driver.

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