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The Electric Vehicle Tax Credit is a federal tax credit that applies to all-electric and plug-in hybrid cars purchased new in or after 2010. The credit is worth up to $7,500, and it can be used to offset the cost of buying a new electric vehicle. The credit amount varies based on the capacity of the battery used to power the vehicle.
Congress recently passed the Inflation Reduction Act of 2022, which significantly changed the credit amounts and requirements for clean energy vehicles. Here is what you need to know about the new electric vehicle (EV) tax credit.
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How does the tax credit work?
A tax credit reduces the total amount of income tax you owe. So, if you owed $10,000 in federal income tax, the $7,500 EV credit would reduce the amount you owed to $2,500. With a credit, your actual savings would be $7,500.
It is important to understand however that if the taxes you owe are less than the credit, then you will only save on that amount. For example, if you owe $3,500 in income taxes this year, that is the tax credit you will get. Any unused tax credit does not carry over to the next year. Under the new EV laws however, you can receive the credit upfront at the dealership.
What are the major EV tax credit changes?
The Inflation Reduction Act of 2022 amended the Qualified Plug-in Electric Drive Motor Vehicle Credit, now known as the Clean Vehicle Credit, and added a new requirement for final assembly in North America that took effect on Aug. 17, 2022.
Final assembly in North America
If you bought an EV before Aug. 17, 2022, you are eligible for the tax credit. EVs purchased between Aug. 17, 2022 and Dec. 31, 2022 are eligible only if final assembly was in North America. In addition, the battery's components and materials must be in countries with which the U.S. has a free trade agreement. The new law essentially requires more domestic manufacturing to qualify for the full credit.
Sales cap removed
EVs purchased after Jan. 1, 2023, are no longer subject to the manufacturer sales caps. Previously, once an automaker sold 200,000 EVs, the tax credits would begin to phase out. The new law removes this limit. This primarily impacted Tesla, GM, and Toyota.
Price cap of electric vehicle
To be eligible for the credits, the MSRP of electric vans, sport utility vehicles, and pickup trucks must be below $80,000. All other vehicles must be below $55,000.
Cap on income
In addition to the price of the EV being capped, you must also meet income limits. To qualify for the credit your modified adjusted gross income (MAGI) must be less than:
- $300,000 for joint filers
- $225,000 for head of household filers
- $150,000 for single filers
Used vehicles qualify
Previously only new EVs qualified for the tax credit. Now, used EVs qualify for up to a $4,000 credit. There are certain restrictions, though. The cost of the car must be under $25,000, be two model years old, and be purchased at a dealership. The vehicle only qualifies for the credit once in its lifetime and individual buyers must make $75,000 or less, $112,500 for heads of households, and $150,000 for joint return filers. The credit ends in 2032.
Tax credit upfront
Starting in 2024, you can get your EV tax credit when you purchase the car. Currently, you have to wait to file your taxes before you get the credit. Now, if the purchase qualifies for the full tax credit, the dealership can offer the credit immediately, reducing the price of the EV by $7,500.
Vehicle manufacturers eligibility
Since the final assembly of EVs must be in North America to qualify for the credit, the U.S. Department of Energy has created a list of eligible vehicles. As vehicle manufacturers continue to submit vehicle identification information to the relevant government agencies, this list will be updated frequently.
If you are not sure, you can input the EV's vehicle identification number (VIN) on the VIN Decoder website. The VIN Decoder is run by the National Highway Traffic Safety Administration (NHTSA) and will tell you where the vehicle was manufactured.
The Clean Vehicle Credit was passed with the goal of reducing emissions and improving air quality. It is hoped that this credit will encourage more people to buy electric or hybrid vehicles, which produce significantly fewer emissions than traditional gas-powered cars. The major changes for the new EV tax credits include the manufacturing sales cap, restrictions on income and price of the EV, as well as where the EV is assembled.
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