How Do EV Tax Credits Work?

2024 lexus rx450h
Your 2024 Guide to EV Tax CreditsLexus

The federal government has been subsidizing the production and sale of electric vehicles for more than a decade. Through a $7500 credit administered by the Internal Revenue Service, many buyers of battery-electric and plug-in hybrid vehicles have reduced their tax bills or taken the credit at the point-of-sale to reduce the sales price of their battery-powered vehicle.

How EV Tax Credits Work and How to Claim Them

Currently, the tax credit for purchasing a qualifying new battery-electric and plug-in hybrid vehicles is either $3750 or $7500. Used EVs and PHEVs sold for $25,000 or less are also eligible for a credit of 30 percent of the sale price (up to a maximum of $4000), provided these vehicles are two model years older than the current calendar year and include a battery pack with a capacity of at least 7.0 kilowatt-hours, have a gross vehicle weight rating under 14,000 pounds, and a prior owner has not yet claimed the used tax credit during a previous sale. To even claim the credit on an eligible vehicle, though, your adjusted gross income limit (AGI), needs to fall under certain thresholds outlined by the IRS and shown in the graph below.

Types of EV Tax Credits

The aforementioned tax credits for purchasing qualified new or used battery-powered vehicles are the most common ways to claim the EV tax credit. However, there is an additional way the tax credit can benefit new-vehicle buyers, and that's by leasing one.


Thanks to a loophole in the IRA law, many new battery-powered vehicles—even those that don't qualify for the credit if purchased, can receive the full $7500 credit if they're leased.

You cannot personally claim an EV tax credit on a leased vehicle, because the automaker's bank is the owner. However, many manufacturers are passing these savings on to consumers via lower monthly payments and/or upfront costs.

How Do Federal EV Tax Credits Work?

The credits reduce a filer's federal income tax for the year, subject to price and income caps. EV tax credits are nonrefundable. This means they can only be applied to tax owed in the year in which you took delivery. Businesses, however, can transfer new EV tax credits to future years. There are many limitations that can reduce or forfeit the filer's tax credit.

Alternatively, you can receive the credit immediately at the point of sale. Going this route means you authorize the IRS to transfer the credit to the dealership, which then reduces the purchase price by the credit's amount.

How to Claim an EV Tax Credit on Your Return

You will need to file a federal income tax return and Form 8936 for the year in which the vehicle was delivered and put into service to claim the credit on your return.

You will not realize any credit until you file a tax return for the preceding year. For example, if you took delivery of an EV eligible for a $7500 tax credit in 2024 and your federal tax for that year was $8500, your total tax would be $1000.

You would then pay the balance of whatever you owe or elect to be refunded the credit's amount (or apply the refund to the next tax year). Consequently, if you owe a lesser amount of taxes than the credit, then your credit is reduced to that lesser amount. In the same example, if you owed $6500 in tax, you would only receive a $6500 credit.

If you exceed the income caps, you must pay back all of the credit as part of your income tax.

Transferring an EV Tax Credit to a Dealership

By transferring the credit to the dealer you will receive the full credit (regardless of your overall tax liability) at the time of sale in either cash or a reduced down payment. The dealer must be registered with the IRS, which checks in real time if a car is eligible for a credit and for how much.

The dealer receives the credit payment within two to three days after the sale. You still have to file the credit paperwork with your tax return, and if you do not meet the requirements—say, you get a big raise halfway through the year—you may have to repay the credit as income tax.

Buyer beware: This is an easy scam. Get a copy of the bill of sale the dealer sends to the IRS and the confirmation the IRS sends to the dealer. Be certain the cash or discount on the final purchase price is correct. Current IRS guidance does not appear to penalize a dealer from keeping some or all of the credit.

What Cars Qualify for the Federal EV Tax Credit?

Qualifying EVs and PHEVs must be built in North America. Hydrogen fuel-cell vehicles can come from anywhere. There are also rules around vehicle prices, purchaser income, and battery production. Any foreign-made EV is ineligible (check the VIN of the specific vehicle you're looking at to confirm it was assembled in North America). EVs made in North America may be eligible for either $3750 or $7500. There is no amount in between.

Below are the general requirements that determine if a vehicle qualifies for the federal EV tax credit and the sum of the credit itself.

General Vehicle Requirements for NEW EVs

  • Built in the U.S, Canada, or Mexico

  • Battery capacity must be at least 7.0 kWh and capable of being recharged from external power source

  • Gross Vehicle Weight Rating (GVWR) must be less than 14,000 pounds

  • Made by a qualified manufacturer registered and approved by the IRS

Price Caps

  • $55,000 MSRP for cars

  • $80,000 MSRP for SUVs, crossovers, and light trucks

  • MSRP is defined as the manufacturer price for the chosen trim level at the time of sale, excluding destination fees and dealer-installed accessories or add-ons. Incentives and trade-in credits do not affect the MSRP.

Battery Production

  • A minimum percentage of the "critical minerals" must be "extracted or processed in the United States or a country with which the United States has a free trade agreement, or be recycled in North America," according to the U.S. Treasury.

  • Critical minerals are defined by the Secretary of the Interior and include nearly every mineral used in a battery today (lithium, cobalt, manganese, nickel).

  • Only vehicles with batteries that meet this requirement receive an initial $3750 tax credit.

  • A minimum percentage of the battery's components "must be manufactured or assembled in North America," according to the U.S. Treasury.

  • No eligible battery can contain any components made in China, Russia, Iran, or North Korea. From 2025 on, these geographical restrictions will also apply to the manufacturing and assembly of batteries, as well.

  • Only vehicles with batteries that meet the component requirement receive a secondary $3750 tax credit.

  • Only vehicles with batteries that satisfy both requirements are eligible for the $7500.

General Requirements for USED EVs

  • Must be purchased from a licensed dealer; no private sales

  • Must be at least two model years old

  • Cannot be the original owner

  • Can claim only one used vehicle credit every three years

  • Battery capacity must be at least 7.0 kWh and capable of being recharged from external power source

Price Caps and Other Restrictions

  • $25,000

  • Claim value of 30 percent of the sale price (capped to a maximum $4000)

When Do EV Tax Credits Expire?

The tax credits currently end on December 31, 2032.

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