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With the Clean Vehicle Credit, under the Inflation Reduction Act, not only do you have a chance to save money on gas by purchasing an electric car, but this credit is a dollar-for-dollar reduction of the taxes you owe by $7,500 if you purchase a new electric vehicle and by up to the lesser of $4,000 or 30% of the purchase price for a used electric vehicle.
This credit isn’t just about saving; it’s a nod towards cleaner rides and a nudge in the right direction for a more sustainable drive. To help you determine if you’re able to take this credit, we’ve outlined the basics, including what it is, how it works, and the current requirements.
What is the Clean Vehicle Tax Credit?
The EV Tax Credit, introduced to help lower people’s taxes who purchase electric vehicles, was originally available for up to $7,500 for new electric vehicles under Internal Revenue Code Section 30D. The Inflation Reduction Act of 2022 expanded and changed the rules for electric vehicles purchased beginning in 2023 through 2032 and created the renamed Clean Vehicle Credit.
Under the Inflation Reduction Act, like the previous provision, if you purchase a new plug-in EV or fuel cell vehicle in 2023 or later, you may still qualify for a clean vehicle tax credit, potentially up to $7,500. The difference is there are now income, manufacturer sales price, and final assembly requirements that were not in place before. In addition, beginning in 2023, you can now purchase a used electric vehicle and get a tax credit of up to the lesser of up to $4,000 or 30% of the purchase price of the used electric vehicle. Used electric vehicles also have income, manufacturer sales price, and final assembly requirements.
How does the Clean Vehicle Tax Credit work?
The Inflation Reduction Act of 2022 was a shift in practice, especially for vehicles purchased between 2023 and 2032. This federal EV tax credit isn’t just for individuals; businesses can take advantage of the IRS EV tax credit, too.
There are income thresholds in place, so it’s not a total free-for-all – you still need to meet certain criteria.
It’s also important to note that the credit is non-refundable, meaning you can’t pocket more than you owe in taxes, but you are at least able to reduce your taxes dollar for dollar.
Which cars qualify for the Clean Vehicle Tax Credit?
Wondering if your vehicle makes the cut for the EV tax credit? It’s not a one-size-fits-all situation, but don’t worry; we’ll break it down for you.
To qualify for the EV tax credit, a vehicle must have a battery capacity of at least seven kilowatt-hours and meet critical mineral and battery component requirements, among other factors. The exact eligibility requirements will now also depend on your income, manufacturer’s sales price, and whether the electric vehicle received final assembly in the U.S. This includes used electric vehicles which you can now also claim a credit for.
You can find more details about these qualifications below.
Guidance for vehicles purchased in 2022
New electric vehicles purchased prior to the Clean Vehicle Credit were eligible for a tax credit of up to $7,500. Under the Inflation Reduction Act, people were still eligible for a tax credit of up to $7,500, but the credit was expanded. Starting January 1, 2023, people who purchase used electric vehicles may be eligible for a credit of 30% of the sale price up to $4,000, depending on their income.
For vehicles purchased after August 16, 2022, only vehicles for which final assembly occurred in North America qualify. The US Department of Energy has released a list of model year 2022 and 2023 vehicles with final assembly in North America.
If you ordered an electric vehicle before August 16, 2022, and took delivery of your vehicle at a later date, you may still be able to claim tax credits for a vehicle not assembled in North America if you had a written binding contract to purchase the vehicle. The Internal Revenue Service (IRS) defines a “written binding contract” as a nonrefundable deposit or down payment of at least 5% of the purchase price.
Guidance for vehicles purchased starting in 2023
Most of the changes are effective with electric vehicle purchases starting January 1, 2023. The major difference is that effective August 17, 2022 final assembly in North America is required. In addition, starting with purchases made on January 1, 2023, tax filers have to meet income and manufacturer sales price requirements for both new and used electric vehicles. If you take possession of a new electric vehicle on or after April 18, 2023 it also has to meet mineral and battery component requirements in order to be eligible for the credit, even if you purchased before that date.
The maximum of up to $7,500 is the sum of two amounts: the critical minerals amount and the battery components.
- Critical Minerals ($3,750): Starting in 2023, to qualify for this portion of the credit, at least 40% of the value of the battery’s applicable critical minerals must have been extracted or processed in the United States (or in a country with which the United States has a free trade agreement) or recycled in North America. The 40% amount increases by 10% each year until it reaches 80% in 2027 and thereafter.
- Battery Components ($3,750): Starting in 2023, to qualify for this portion of the credit, at least 50% of the value of the battery’s components must have been manufactured or assembled in North America. The 50% amount increases by 10% each year until it reaches 100% in 2029 and thereafter.
Some other changes to the credit starting in 2023 include:
- Manufacturer’s suggested retail price for vans, sport utility vehicles, and pickups is limited to $80,000, and other cars are limited to $50,000.
- For new cars, modified adjusted gross income cannot exceed $300,000 married filing jointly, $225,000 head of household, $150,000 single.
- Used electric vehicles are purchased from a dealer and have a sale price of $25,000 or less. Sale price includes all dealer-imposed costs or fees not required by law. It doesn’t include costs or fees required by law, such as taxes or title and registration fees.
- Have a model year at least 2 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.
- For used cars, modified adjusted gross income cannot exceed $150,000 married filing jointly, $112,500 head of household, $75,000 single.
- New reporting requirements to include reporting the both taxpayer and seller vehicle identification number (VIN) reporting.
- If you purchase an electric vehicle in 2024, you will have the option to transfer the credits to dealers, and allow the credit to be applied at your point of sale when making the purchase, but make sure you meet the income requirements before the credit is applied to your sale as you will have to report that you received the credit when you do your 2024 taxes.
- For business owners, the Inflation Reduction Act also adds a tax credit of up to $7,500 for new commercial clean vehicles placed in service after December 31, 2022.
What is the income limit for the federal Clean Vehicle Tax Credit?
Both individuals and businesses are eligible for the IRS EV tax credit. To qualify, you have to buy the vehicle for personal use, primarily use it in the United States, and meet income thresholds, such as $300,000 for married couples filing jointly, $225,000 for heads of households, or $150,000 for all other filers for new vehicles that were purchased in 2023 or later and $150,000 married filing jointly, $112,500 head of household, $75,000 single if you purchased a used electric vehicle.
The credit is based on your modified adjusted gross income (AGI) from the year you get the car or the preceding year, whichever is lower. If your AGI falls below the threshold in either of these years, you can claim the credit.
There’s a catch, though: the tax credit for EVs is non-refundable, meaning you can’t receive more than your owed taxes, and any excess credit can’t be carried forward to future tax years.
How do you claim the Clean Vehicle Tax Credit?
Claiming the Federal EV Tax Credit is a crucial step in getting the most out of your benefits, which often includes overlooked tax credits. When filing your taxes, make sure to have the pertinent information and forms at hand, such as details about your vehicle’s battery capacity, weight, final assembly location, and VIN. You will need that information in order to claim the credit and file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit (Including Qualified Two-Wheeled Plug-in Electric Vehicles) with your tax return.
Don’t worry about knowing what forms to file in order to get the Clean Vehicle Tax Credit. TurboTax will ask simple questions about your electric vehicle purchase as well as know your income uploaded from your forms that report income like W-2s and 1099s and will give you the electric vehicle credit you’re eligible for based on your entries. You can also come to TurboTax and ask questions along the way and get your return reviewed by a TurboTax Live expert before you file or you can hand your taxes over to a TurboTax Live expert and get them prepared from start to finish. New this year, you can also meet in person with a local pro in your area to get your taxes done.
Is there a difference between state electric benefits and federal EV tax credits?
Yes. The Federal EV Tax Credit, which is administered by the IRS, plays a crucial role in reducing taxpayers’ electric vehicle costs. This specific credit was expanded as part of the Inflation Reduction Act, and aims to lower your tax bill by reducing the taxes you owe.
While the EV federal tax credit is well-known, some don’t realize that some states offer their own benefits for purchasing electric vehicles in the form of rebates, like California’s Clean Vehicle Rebate Project (CVRP). State rebates for electric vehicle purchases are mailed to you when you purchase an electric vehicle if you meet specific requirements for your state, and they are not claimed on your tax return.
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