We research all brands listed and may earn a fee from our partners. Research and financial considerations may influence how brands are displayed. Not all brands are included. Learn more.

Editor:
Published: Jun 24, 2024 11 min read
Charging electric vehicle
Getty Images

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 last year 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 a broader effort to meet climate goals.

The tax credits boosted EV sales last year. Meanwhile, automakers increased vehicle production and announced ambitious electrification plans.

Ads by Money. We may be compensated if you click this ad.AdAds by Money disclaimer
Worried about your electric vehicle? Keep it safe with a Car Warranty
Getting a free quote is the first step to protecting your investment. Click on your state below to get started.
HawaiiAlaskaFloridaSouth CarolinaGeorgiaAlabamaNorth CarolinaTennesseeRIRhode IslandCTConnecticutMAMassachusettsMaineNHNew HampshireVTVermontNew YorkNJNew JerseyDEDelawareMDMarylandWest VirginiaOhioMichiganArizonaNevadaUtahColoradoNew MexicoSouth DakotaIowaIndianaIllinoisMinnesotaWisconsinMissouriLouisianaVirginiaDCWashington DCIdahoCaliforniaNorth DakotaWashingtonOregonMontanaWyomingNebraskaKansasOklahomaPennsylvaniaKentuckyMississippiArkansasTexas
See Details

For 2024, the EV tax credit was revised so that buyers can get the money taken off the price of the vehicle at the point-of-sale. The change meant the benefit was available immediately and buyers no longer had to wait until tax season to get the money. The change also made the credit available to Americans with less than $7,500 of tax liability.

But so far in 2024, EV sales have been disappointing, representing only 7.3% of new car sales in the first quarter compared to 8.1% at the end of 2023. Some of the momentum around EVs faded with automakers like General Motors scaling back their EV production goals due to lower-than-expected-demand.

EV shoppers are benefitting from the heavy supply on dealer lots, which has led to lower prices. Factoring in the tax benefit, it’s become much easier to go all-electric.

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?

As of January 2024, the IRS gives 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.

You can also opt to claim the tax credit the original way, meaning you use it to reduce 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.

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.

Ads by Money. We may be compensated if you click this ad.AdAds by Money disclaimer
Your electric vehicle is an investment — make sure it’s protected
Get the Car Warranty you need without breaking the bank. Click below to get started.
See Details

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, the 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

Most EV buyers 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.

To claim the EV tax credit with your taxes, you’ll need to use Form 8936. You can accomplish this quickly with tax prep software, which will use prompts to walk you through the process. You’ll also have to fill out this form if you take the credit with your purchase. If you’re leasing an EV, the form isn’t necessary because the tax credit goes to the dealer.

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.

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 2024, EV buyers 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 — about 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.

More from Money:

EV or Hybrid? Car Buyers Have a Clear Favorite

As Used Car Prices Fall, Here’s How to Get the Best Deal

8 States Now Plan to Ban Gas-Powered Car Sales

Ads by Money. We may be compensated if you click this ad.Ad
Stop paying for costly car repairs and get an Extended Car Warranty!