Key Takeaways
- The federal EV tax credit, worth up to $7,500, is a nonrefundable tax credit that has been an effective way to lower the cost of EV ownership for taxpayers.
- The Inflation Reduction Act of 2022 changed this tax credit by extending its life through 2032 and expanding it to cover more vehicles.
- The new clean vehicle credit also covers pre-owned clean vehicles starting in 2023.
- Beginning in 2024, you can opt for transferring the clean vehicle credit directly to an automotive dealer instead of waiting to claim it on your tax return the next year.
What brought about the clean vehicle credit?
The trajectory of climate change was in the crosshairs of the Inflation Reduction Act of 2022, with the US government aiming to lessen the impact seen on the environment. One major culprit of greenhouse gas emissions comes from the transportation sector, gasoline-powered automobile transportation in particular. As a way to lure taxpayers away from internal combustion gas vehicles, the tax code offered a generous incentive to car buyers interested in purchasing an electric vehicle for the first time. The previous credit had a limit on the number of electric vehicles a vehicle manufacturer could sell and was worth $7,500. The rules have changed, and we’ve got what you need to know about the new clean vehicle tax credit.
What is the electric vehicle tax credit?
The electric vehicle tax credit, also known as the EV tax credit, is a nonrefundable credit meant to lower the cost of qualifying plug-in electric or other “clean” vehicles. The credit is worth between $2,500 and $7,500 for the 2022 tax year and eligibility for claiming the credit depends on the number of electric vehicles sold by the manufacturer, the vehicle’s weight, and if you own the car. The only change made to the credit for tax year 2022 is a new North American final assembly requirement, effective August 17, 2022.
The newly modified credit, now called the clean vehicle credit, has new rules for claiming the credit based on assembly location, income thresholds, and expanded eligibility for the vehicles covered by the credit. These new rules largely take effect in 2023 and last until 2032.
Beginning with tax year 2023, in addition to a new North America final assembly requirement, the former $7,500 credit is broken into two new credits worth up to $3,750 each for qualifying buyers of new all-electric cars, fuel cell vehicles and hybrid plug-ins. One of the new $3,750 credits is available for meeting the critical minerals requirement and the other for purchasing a qualifying vehicle that meets the battery component requirement.
The credit ends December 31, 2032.
How does the clean vehicle credit work?
The clean vehicle tax credit has a number of stipulations you’ll need to meet to qualify for claiming the two-part credit on a fully electric or plug-in-hybrid electric vehicle placed in service after April 17, 2023.
To be considered a qualified clean vehicle, it needs to meet these criteria:
- Have a battery storage capacity of 7 kilowatt-hours (kWh) or more.
- Weigh less than 14,000 pounds in gross vehicle weight.
- Be produced by a qualified manufacturer (fuel-cell vehicles excluded).
- Undergo final assembly in North America.
- Have 50% or more of the value of the battery components manufactured or assembled in North America (required for one of the $3,750 credits).
- Have 40% or more of the value of the minerals contained in its battery mined or processed in countries with which the US has a free trade agreement, or recycled in North America to receive the remaining $3,750 credit.
- Have a manufacturer suggested retail price that doesn't exceed $80,000 for SUVs, pickups, and vans or $55,000 for other vehicles.
To claim the tax credit, you’ll need to meet the following requirements:
- You have to purchase a new car that meets the above criteria for being a qualified clean vehicle. It can’t be leased or purchased used (a lesser amount is available for previously-owned vehicles under a different credit called the used clean vehicle credit).
- You can’t purchase the clean vehicle for resale, meaning you can’t act solely as a middleman when making the purchase of a clean vehicle to claim the tax credit.
- Meet certain income requirements detailed below
- Use the qualifying vehicle primarily in the United States
- The seller or dealer is required to report to both you and the IRS certain information about the vehicle you purchase including:
- seller/dealer name and taxpayer ID number
- buyer's name and taxpayer ID number
- maximum credit allowable under IRC 30D for new vehicles or IRC 25E for previously owned vehicles
- vehicle identification number (VIN), unless the vehicle is not assigned one
- battery capacity
- date of sale
- sale price
- for new vehicles, verification that the buyer is the original user
What did the Inflation Reduction Act of 2022 change about the EV tax credit?
The Inflation Reduction Act significantly altered, extended, and renamed the EV tax credit. Depending on when you buy an EV or clean vehicle, you may encounter different rules for claiming the credit.
EV tax credit: Before August 17, 2022
Prior to the changes brought from the Inflation Reduction Act, the EV tax credit was worth $7,500 and could be claimed on cars that met certain battery capacity requirements and was phased out once a manufacturer sold 200,000 EVs.
EV tax credit: Between August 17, 2022 and December 31, 2022
After passage of the Inflation Reduction Act, any clean vehicle that was purchased from August 17, 2022, to December 31, 2022, needed to have their final assembly completed in North America to meet eligibility requirements.
The US Department of Energy has compiled a list of vehicles that likely qualified through December 31, 2022.
If you entered into a binding written contract to purchase an EV before August 17 that qualified for the previous EV tax credit rules and expect the car to be delivered at a later date, you’re generally still eligible to claim the credit without needing to meet the additional final North American assembly requirement.
Clean vehicle tax credit: After December 31, 2022
Below, we cover the new rules and requirements for claiming the clean vehicle tax credit.
Extended credit value
The value of the new clean vehicle tax credit has been extended through December 31, 2032, adding nine years of availability.
Income limitations
The clean vehicle tax credit now applies income limitations for eligibility based on your filing status and the lesser of your modified adjusted gross income (MAGI) for the year that the new clean vehicle was placed in service or for the preceding year:
- Married Filing Jointly: Your MAGI can’t exceed $300,000
- Head of Household: Your MAGI can’t exceed $225,000
- Single or Married Filing Separately: Your MAGI can’t exceed $150,000
Clean vehicle price caps
The clean vehicle tax credit has price limitations tied to the Manufacturer’s Suggested Retail Price (MSRP) on new EVs as follows: vans, SUVs, and pickup trucks can’t exceed $80,000 while sedans and other vehicle types can’t exceed $55,000.
North American assembly requirements
Another new requirement for claiming the credit comes from needing to have the final assembly occur within North America. If you’d like to check your car’s final assembly details, you can reference the National Highway Traffic Safety Administration’s VIN database. (Note: This is also a condition for EVs purchased between August 17, 2022, and December 31, 2022.)
Two credits: New battery and sourcing requirements
The new clean vehicle tax credit is made up of two requirements that total to $7,500 ($3,750 each). The two requirements are as follows:
- Battery requirement: The new credit requires a portion of the car’s battery to be assembled or manufactured in North America under the following percentage thresholds by year:
- 2023: 50%
- 2024: 60%
- 2025: 60%
- 2026: 70%
- 2027: 80%
- 2028: 90%
- 2029 through 2032: 100%
(Note: Rules around new battery and sourcing requirements are not yet finalized and await further guidance from the Treasury Department. Until guidance is issued and implemented, this requirement won’t be enforced when determining eligibility for claiming the clean vehicle tax credit.)
- Critical minerals requirement: In addition to the battery requirement, cars must also meet a stipulation called the "critical minerals requirement" to receive the remaining $3,750 portion of the credit. Much like the need for North American assembly or manufacturing for the battery requirement, this additional requirement maintains a certain percentage of critical minerals found in the car’s battery must be extracted or processed in the US or a country with whom it has a free-trade agreement by year as follows:
- 2023: 40%
- 2024: 50%
- 2025: 60%
- 2026: 70%
- 2027 through 2032: 80%
To maintain further preference for domestic manufacturing, assembly, extraction and processing, the credit also disallows sourcing battery parts from a foreign entity of concern starting in 2024. Further, clean vehicles can’t contain critical minerals sources from foreign entities of concern starting in 2025 onward.
Transfer at point-of-sale
Beginning in 2024, you can claim the credit by transferring it to a dealer at the point-of-sale. By doing this, it directly reduces the qualifying vehicle’s purchase price. You won’t need to wait until you file your tax return to claim your credit, instead realizing a lower purchase price at the dealer. You will still pay any applicable sales taxes and licensing fees at the full non-credit-adjusted purchase price. Meaning, for example, if you bought a qualifying car for $35,000 but had the price lowered to $27,500 by claiming the credit at your dealer, your sales tax and licensing fees would relate to the $35,000 purchase price and not the $27,500 net amount you’d pay after claiming the credit.
One item worth noting here relates to the recapture of that transferred credit. You can’t circumvent the income limitations of the credit by transferring the credit at the point-of-sale, as it could result in paying back the credit. This credit, if transferred to the dealer, when you earn too much income to claim it yourself, would be recaptured and would require you to repay your tax liability accordingly. However, if you do not have sufficient tax liability to fully use the credit if it was included on your tax return, you are not obligated to pay it back. This can effectively make the credit partially or fully refundable for certain taxpayers.
Used clean vehicle credit
Used cars have become eligible for the new tax credits, under the used clean vehicle credit. While this is a lesser amount than the $7,500 credit available for new qualified vehicles, it's still a new credit that can make purchasing previously-owned clean vehicles more affordable for consumers. The new tax credit for pre-owned clean vehicles lasts for tax years 2023 through 2032. Qualified buyers can get a credit equal to the lesser of $4,000 or 30% of the sales price.
Other stipulations apply:
- model year must be at least two years earlier than the year you acquired the vehicles
- purchase price can't exceed $25,000
- vehicle identification number (VIN) must be reported on your tax return
- vehicle doesn’t need to be assembled in North America
- must acquire from a dealer licensed to engage in sale of vehicles
- can only be claimed on the first sale of the qualifying used vehicle after 12/31/2022 to a qualified buyer (this prevents continued sales of the used vehicle for purposes of claiming the credit)
Additionally, similar to the MAGI limitations on new vehicles based on the lesser of your MAGI for the year that the used clean vehicle was placed in service or for the preceding year as follows for your filing status:
- Married Filing Jointly: Can’t exceed $150,000
- Head of Household: Can’t exceed $112,500
- Single or Married Filing Separately: Can’t exceed $75,000
Local tax incentives
These are new rules for claiming the federal clean vehicle tax credit, but they don’t necessarily cover any state or local-incentives offered by your government, utility, or other programs. In some cases, you may have the opportunity to claim additional incentives to drive down the cost of clean vehicle ownership further through local programs, discounts, and tax incentives. Make sure you review all available information related to your location to see if you might qualify for other tax measures and price incentives.
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