What You Need To Know About Electric Vehicle (EV) Tax Credits

My husband is buying a new car today. He considered buying a new electric vehicle (EV) but ultimately opted not to—another model caught his eye. But increasingly, consumers are opting in—in 2022, more than 750,000 new EVs were registered in the U.S. With a whopping 13.4 million light vehicles sold in the U.S. last year, EVs captured only about 5% of the market, but the number sold still reflects a 57% boost over those sold in 2021.

History

Despite the recent popularity, EVs are not a new invention. Engineers from many parts of the world, including in the Netherlands, tinkered with the concept as early as the 1800s—early prototypes are on display in the Louwman Museum in The Hague (we were lucky to see them up close this summer).

The earliest known EV in the U.S. was likely developed in 1890 by William Morrison in Des Moines, Iowa. Morrison’s six-passenger vehicle could reach a top speed of 14 miles per hour—by comparison, Gottlieb Daimler’s 1886 design, considered the world’s four-wheeled automobile, was only capable of a top speed of 11 miles per hour.

EVs were fast (relatively speaking), quiet, and—importantly—not smelly. As a result, they were appealing to new car buyers. By 1900, electric cars accounted for around a third of all vehicles on the road.

In 1908, Henry Ford’s mass-produced Model T made gasoline-powered cars more affordable. By 1912, a gasoline car cost only $650, about a third of the cost of its electric counterpart. And by the 1920s, the open roads were calling to Americans, thanks to the discovery of Texas crude oil (and cheap gas). By 1935, EVs had nearly disappeared.

In 1973, the OPEC oil embargo caused American drivers to take another look at EVs. The interest didn’t last long, but interest in other parts of the world was growing. In 1997, the world’s first mass-produced hybrid EV, the Toyota Prius, was released in Japan. By 2000, the Prius was released worldwide, attracting the notice of celebrities. In 2006, Leo DiCaprio announced, “I own a Toyota Prius; it’s a step in the right direction.”

Automobile manufacturers like Honda, Chevrolet, and Nissan followed suit—as well as a tech-focused start-up called Tesla Motors. By 2009, EVs were becoming mainstream. To encourage more sales, the Obama administration created an EV tax credit.

EV Tax Credit

That tax credit has evolved over the years. Today, if you buy a new plug-in EV or fuel cell vehicle (FCV) in 2023 or later, you may qualify for a clean vehicle tax credit of up to $7,500. Details for the clean vehicle tax credit can be found in section 30D of the Tax Code.

Generally, to qualify, you must buy a qualifying EV for your own use primarily in the U.S. Your income level also comes into play, since your modified adjusted gross income (AGI) may not exceed $300,000 for married couples filing jointly ($225,000 for heads of household and $150,000 for all other filers). You can use your modified AGI from the year you take delivery or the year before, whichever is less.

The credit is nonrefundable. A nonrefundable credit reduces your tax liability to zero, but not below zero—you can’t get back more than you owe in taxes. Additionally, you can’t apply any excess credit to future tax years.

Most importantly, the amount of the credit changes depending on when you place the vehicle in service.

Jan. 1 To April 17, 2023

For qualifying vehicles placed in service between Jan. 1 and April 17, 2023, the credit can be up to $2,500 (base amount) plus $417 for a vehicle with at least 7-kilowatt hours of battery capacity and $417 for each kilowatt hour of battery capacity beyond 5-kilowatt hours—up to $7,500 of total credit.

Typically, the minimum credit will be $3,751—that’s $2,500 base amount + (3 x $417 credit amount for a vehicle with the minimum 7-kilowatt hours of battery capacity).

April 18, 2023, And After

Qualifying vehicles placed in service after April 18, 2023, must meet new critical mineral and battery component requirements. The credit will be up to $3,750 if the vehicle only meets the critical minerals requirement and $3,750 if the vehicle only meets the battery components requirement. If the EV meets both criteria, the credit is up to $7,500. A vehicle that doesn’t meet either requirement will not be eligible for any credit.

As part of the administration’s efforts to keep production close to home, to be eligible for the battery portion of the credit, a certain percentage of the vehicle’s battery must be assembled or manufactured within North America. Those percentages change every year. Here’s the list by year:

• 2023: 50%
• 2024: 60%
• 2025: 60%
• 2026: 70%
• 2027: 80%
• 2028: 90%
• 2029-2032: 100%

The same is true of the critical minerals requirement. Here’s the list by year:

• 2023: 40%
• 2024: 50%
• 2025: 60%
• 2026: 70%
• 2027-2032: 80%

2022 Or Before

To claim the credit for new EVs placed in service in 2022 or before, you have to look at battery capacity. Generally, you may be eligible for a clean vehicle tax credit up to $7,500, which equals $2,917 for a vehicle with a battery capacity of at least 5-kilowatt hours plus $417 for each kilowatt hour of capacity over 5 kilowatt hours. Additional restrictions and criteria apply—you can find those here.

Qualifying Vehicle

Under current law, a qualifying vehicle is one that has undergone final assembly in North America. It must have a battery capacity of at least 7-kilowatt hours and have a gross vehicle weight rating of less than 14,000 pounds—those EVs placed in service after April 18, 2023, must also meet critical mineral and battery component requirements, as noted above.

Additionally, an EV must be made by a qualified manufacturer (FCVs do not)—Rev. Proc. 2022-42 provides more details.

Qualifying Sale And Delivery

For purposes of the credit, sellers are required to report your name and taxpayer ID to the IRS, as well as additional information such as the vehicle identification number (VIN) and battery capacity. In addition, the dealer must report the manufacturer suggested retail price (MSRP)—that dollar amount can’t exceed $80,000 for vans, sport utility vehicles, and pickup trucks, or $55,000 for other vehicles. And sales only—a lease will not qualify for the credit.

If you need help determining whether your vehicle qualifies, you can check here. You’ll need the make and model, including model year, and vehicle type.

You claim the credit in the tax year that the vehicle is delivered, not the year it is purchased. So, if you bought an EV in 2023 but your delivery is delayed to 2025, you will claim the credit on your 2025 tax return.

Used Cars

Used cars may qualify for a credit, too. But the rules and language are different if you buy a qualified used EV or FCV. That credit is referred to as the used clean vehicle tax credit, sometimes called a previously owned clean vehicle credit, and equals 30% of the sale price up to a maximum credit of $4,000.

As with the EV credit for new cars, the credit is nonrefundable, and you can’t apply any excess credit to future tax years. Additionally, this credit applies to vehicles purchased in 2023 or later—purchases made before 2023 don’t qualify.

To qualify, you can’t be the vehicle’s original owner, and you can’t be claimed as a dependent on another person’s tax return. The vehicle must be for your use rather than resale. And, importantly, you may not have claimed another used clean vehicle credit in the three years before the purchase date.

Income restrictions apply here, too. Your modified adjusted gross income may not exceed $150,000 for married filing jointly ($112,500 for heads of households and $75,000 for all other filers). As with the EV credit for new cars, you can use your modified AGI from the year you take delivery of the vehicle or the year before, whichever is less.

The vehicle must be for use primarily in the U.S. The sales price must be $25,000 or less, and the model year must be at least two years earlier than the calendar year when you buy it. For example, a vehicle purchased in 2023 would need a model year of 2021 or older. The vehicle must not have already been transferred to a qualified buyer after Aug. 16, 2022. And it must have a gross weight rating of less than 14,000 pounds and be an eligible FCV or plug-in EV with a battery capacity of at least 7-kilowatt hours.

The sale qualifies only if you buy the vehicle from a dealer—a dealer is defined as a person licensed to sell motor vehicles in a state, the District of Columbia, the Commonwealth of Puerto Rico, any other territory or possession of the United States, an Indian tribal government, or any Alaska Native Corporation.

For purposes of the credit, sellers must report certain information, including your name and taxpayer ID number, the sale date and sale price, the VIN, and battery capacity.

If you need help determining whether your vehicle qualifies, you can check on this page. You’ll need the make and model, including model year, and vehicle type.

Claiming The Credit

Whether your vehicle is new or used, you’ll claim the credit on Form 8936, which is filed with your tax return (the form was revised in January of 2023, expect it to be changed again for the next filing season).

As part of the Inflation Reduction Act of 2022, the EV tax credit was extended long-term—that means that the credit should remain available for those buying vehicles through 2032.

State Credits

State credits may also apply. If your state offers a credit, pay attention to details. Restrictions may apply, including a limitation on your right to claim the maximum credit for state and federal purposes.

The Bottom Line

Tax credits—a dollar-for-dollar reduction in your tax liability—can be valuable incentives for behaviors like buying an EV. But make sure that it makes sense for you beyond the tax savings, and pay attention to the specific rules to ensure you qualify if you’re banking on the tax credit. It’s always a good idea to consult with a tax professional when you have questions.