Yahoo Autos How Do EV Tax Credits Work?
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, hundreds of thousands of EV buyers have reduced their tax bills. But now it's not as simple. If you're wondering what the deal is on a new 2024 vehicle—and now, used EVs and plug-in hybrids—here's what you need to know. But first, a brief history.
In the 2010s, the Credit Started Slow
In 2010, the IRS phased out tax credits worth up to $3400 for hybrids, diesels, and natural gas vehicles and established an EV tax credit worth up to $7500 for the handful of plug-in hybrids and battery-electric vehicles on sale. In the decade since, several automakers hit production caps that left their customers ineligible to claim the credits, all while a significant portion of those buyers—high-income earners who could easily drop 100 grand on a Tesla Model S—were being unnecessarily subsidized by taxpayers.
Then came the COVID-19 pandemic in 2020, which completely disrupted automotive supply chains and exposed a serious weakness in U.S. manufacturing, namely its reliance on critical parts from China and Russia. Legislators threw down billions to make up for the economic harm resulting from state shutdowns and COVID-19 restrictions. To combat the resulting high inflation, legislators passed yet another bill in 2022—the Inflation Reduction Act (IRA)—which dramatically changed the way the federal government incentivizes EVs.
2024 EV Tax Credit
There are now two types of EV tax credits and three ways to claim them. The EV tax credit for new vehicles is either $3750 or $7500, but very few new vehicles now qualify. For those that do, the buyer (individuals or businesses) can claim the credit by either:
Filing a federal income tax return and Form 8936 for the year in which the vehicle was delivered and put into service.
Receiving the credit immediately at the point of sale, in which you authorize the credit's transfer to the dealership, which then reduces the purchase price by the credit's amount.
The third method is a loophole in the IRA law. Many unqualified new vehicles can receive the full $7500 if they're leased. You cannot personally claim an EV tax credit on a leased vehicle, because the automaker's bank is the owner. But your lease payments may be reduced if the bank passes on some or all of its tax credit savings in your contract. Many automakers are doing just that.
For used vehicles, the credit is worth 30 percent of the purchase price with a maximum credit of $4000. The claim process works the same way, only there is no credit for used leases and the credit applies only to individuals.
How Do 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.
If You 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 (described below), you must pay back all of the credit as part of your income tax.
If You Transfer the Credit to a Dealer:
You receive the full credit 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 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.
Which Vehicles Qualify for EV Tax Credits?
All qualifying EVs, which includes plug-in hybrids (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.
New EVs and PHEVs Purchased or Financed in 2024
1. General Requirements
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
2. Income Limits
Income is defined as adjusted gross income (AGI), which is the amount listed on line 11 of Form 1040. If you earned income outside the U.S., you must add that income to your AGI.
Single and Married Filing Separately: $150,000
Head of Household: $225,000
Married Filing Jointly and Surviving Spouses: $300,000
