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Taxes

Tax Credit

What Is the EV Tax Credit, and Who Qualifies?

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A major federal tax credit can reduce the cost of buying a new electric vehicle by up to $7,500, making these environmentally friendly cars more affordable than ever before.

EVs are still more expensive than the typical (gas-powered) car, but the clean vehicle tax credits that went into effect in January 2023 help close the gap. The U.S. government changed the rules around EV tax credits in the Inflation Reduction Act in hopes of incentivizing Americans to purchase EVs as part of broader plans to meet climate goals.

So far, it appears to be working. More Americans have gone electric lately. The average EV price has been plummeting with the increase in production and the arrival of new models. Add in a $7,500 tax credit, and EVs are entering the budgets of a wider array of consumers.

Not every EV is eligible for the tax credit, nor is every EV buyer, so it’s important to understand the ins and outs of the current rules. If you're in the market to buy a car, here’s everything you need to know about the EV tax credit:

What is the electric vehicle (EV) tax credit?

The EV tax credit is an incentive that applies to purchases of many new battery electric vehicles (meaning ones that are fully electric, abbreviated BEVs) and plug-in hybrid vehicles (meaning they have a gas engine and a chargeable battery).

The tax credit was established as part of the Inflation Reduction Act, and it replaces an earlier, narrower tax credit that expired at the end of 2022. There's also a used clean vehicle tax credit with a different set of rules.

The maximum tax credit is $7,500 for new EVs and $4,000 for used EVs.

How does the EV tax credit work?

The EV tax credit reduces your federal tax liability for the tax year in which you take possession of the vehicle. If you owe more than $7,500 in taxes and qualify for the full tax credit, you’ll owe that much less when you submit your tax return.

Starting in January 2024, the IRS will give EV buyers the option to instantly access the benefit when they purchase an electric vehicle from a dealership, regardless of their tax liability. This is a major change that significantly expands the tax credit and, in the government's eyes, should further incentivize purchases of electric cars.

To qualify for the tax credit, your modified adjusted gross income cannot exceed a certain threshold: $150,000 for single filers, $225,000 for heads of households and $300,000 for married couples. You can qualify based on your income for the year you take delivery of the vehicle or the year before. For used EVs, the income limits are half those amounts: $75,000 for single filers, $112,500 for heads of households and $150,000 for couples.

Some new vehicle models do not meet the full requirements for the maximum tax credit but qualify for a partial tax credit of $3,750. These are models that fail to satisfy one of two battery sourcing requirements.

Which cars qualify for the EV tax credit?

There are somewhat complicated rules that determine which cars qualify for the EV tax credit.

The final assembly of the vehicle must take place in North America for new cars to qualify for the tax credit. For now, that disqualifies many vehicles. For example, most electric offerings from Hyundai are not currently eligible, but the company says it is working to move operations to address this.

To qualify for the tax credit, the manufacturer's suggested retail price, or MSRP, of the vehicle can’t exceed $55,000 for smaller cars like sedans or $80,000 for larger vehicles like SUVs.

Battery rules also affect eligibility. Half of the tax credit ($3,750) is based on a critical minerals requirement, and the other half is based on a components requirement. Basically, a percentage of the battery's ingredients must come from the U.S. or a country that the U.S. has a free trade agreement with.

Confused? Don’t worry. To figure out whether a certain EV model qualifies, you can just consult the government's list of all the new vehicles eligible for the full and partial tax credit. While the list of new vehicles that qualify for the tax credit is currently somewhat limited, it will likely grow over time. The nascent EV market, which has long been dominated by Tesla, is starting to get more competitive with new model launches — a trend that will continue in 2024 and beyond.

As for used EVs, vehicles must be at least 2 years old in order to qualify for the tax credit, and their price can’t exceed $25,000. More details are available at fueleconomy.gov.

You may also be able to benefit from the tax credit if you're leasing an EV. With leasing, there's a tax credit that goes to the dealer rather than the buyer, though dealers will often pass the savings along to the consumer.

This can be a great option if you want to take advantage of the incentives, but the vehicle you're looking at doesn’t qualify for the new vehicle tax credit — say, if the car wasn’t assembled in the U.S. or it doesn’t meet the battery requirements. Leased vehicles are classified as commercial vehicles for the purpose of the tax credit, and commercial vehicles don't have to meet the same criteria for the tax benefits to apply. It's possible you could get a discount equal to the tax credit, but make sure to confirm this with the dealership.

One other note on leasing: Your income and the price of the vehicle don't matter. If you're a high-earner shopping for a luxury EV, you may want to consider this option.

How to claim the $7,500 EV tax credit

According to the IRS, you should file Form 8936 with your taxes to claim either the new EV tax credit or the used EV tax credit. You can accomplish this quickly with tax prep software, which will use prompts to walk you through the process. If you’re leasing an EV, filing this form isn’t necessary because the tax credit goes to the dealer.

In 2024, EV buyers will have the option to apply the tax credit as a discount upfront at the dealership. That means you won’t have to wait until tax season to get the credit.

How many times can you claim the EV tax credit?

The tax credit for new vehicle purchases can be claimed once per vehicle. There isn’t a limit on how many times you can claim it in a year, so should you decide to purchase multiple new EVs, you can claim the tax credit for each purchase.

Just remember that until 2024, the tax credit can only reduce your tax liability to $0 — you won’t get a rebate beyond that.

With the used EV tax credit, you can only claim it once every three years. There’s also a rule that the used vehicle tax credit can only be claimed once per vehicle, which means if you’re not the first person to take ownership of the car used, you may not be able to claim the credit.

Is the EV tax credit a rebate?

In 2023, the EV incentive is not a rebate. It’s a nonrefundable tax credit, which means that it can only reduce your tax liability to $0.

For example, if your federal tax liability was $5,000 the year you purchased an EV that qualifies for the maximum tax credit of $7,500, the credit will wipe away your tax liability — but you won’t get the remaining $2,500 as a tax rebate.

In 2024, however, EV buyers will have the option to claim the tax credit as a point-of-sale rebate at the dealership, meaning they will get up to $7,500 off their bill immediately rather than having to wait until they file their income tax return.

Can you get a tax credit for a used EV?

More EVs are hitting the used market as some of the popular early models age. A smaller tax credit is available for certain vehicles in that market, too, as long as you buy your used EV from a dealer and satisfy certain requirements.

The used EV tax credit equals 30% of the sales price and maxes out at $4,000. The buyer income limits are $75,000 for single filers, $112,500 for heads of households and $150,000 for married couples filing jointly.

The purchase price of the vehicle must be $25,000 or less, and the car must be at least 2 years old. More specifically, the vehicle must be a model year two or more years older than the calendar year of the purchase. As an example, "a vehicle purchased in 2023 would need a model year of 2021 or older" to qualify, as the IRS explains on its website.

Vehicles must meet weight and battery requirements, but they’re not as strict — nearly 100 BEVs, hybrids and fuel cell electric vehicles meet them.

Use fueleconomy.gov to see if the used EV you’re interested in qualifies for the tax credit.

Latest EV tax credit news

There’s one major change set to take effect for the EV tax credit: Starting Jan. 1, dealerships will be able to process the tax credit at the point of sale.

It's a big deal because buyers won’t have to wait until they file taxes to get the credit. Both new and used EV buyers who qualify for the tax credit will be able to take advantage of this option at car dealerships.

The change also expands the tax credit because Americans with less than $7,500 of tax liability can claim the full credit as a rebate on the purchase.

In other related news, an increasing number of states are charging EV owners special registration fees that can total $200 or more, with Texas being one of the most recent to implement such an extra charge. These EV fees are meant to make up for lost gas tax revenue, but critics say they discourage EV ownership and run counter to the goals of the federal EV tax credit.

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