Yahoo Autos How Do Electric Vehicle 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 2023 or 2024 vehicle, 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.
How Do EV Tax Credits Work?
EV tax credits are available to individuals and businesses buying new or used vehicles with a battery propulsion system that can draw power from an external power source. The credit reduces a filer's federal income tax by up to $7500. For instance, if you bought an EV eligible for a $7500 tax credit and your total federal taxes for the year came to $8500, then you would owe just $1000 to the government.
EV tax credits are nonrefundable. This means they can only be applied to tax owed in the year a vehicle was purchased. If you owe a lesser amount of taxes than the credit, then your credit is reduced to that lesser amount. The tax credits currently end on December 31, 2032.
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, if more than one model will ever be sold, 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 2023
1. General requirements
Built in the U.S, Canada, or Mexico
Battery capacity must be at least 7.0 kWh
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
3. 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.
4. Battery Production
At least 40 percent of the value of a battery's "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 the 40 percent mineral requirement receive an initial $3750 tax credit.
At least 50 percent of the value of a battery's components "must be manufactured or assembled in North America," according to the U.S. Treasury.
Only vehicles with batteries that meet the 50 percent component requirement receive a secondary $3750 tax credit.
Only vehicles with batteries that satisfy both requirements are eligible for the $7500.
New EVs and PHEVs Leased in 2023
You cannot claim any tax credit on a leased vehicle, because the automaker's bank is the owner. But you can save up to $7500 on a lease if the bank passes on some or all of its tax credit savings in the contract. Because the U.S. government is a complicated mess of agencies, the Treasury Department issued guidance to exempt any leased EV or PHEV from battery production and final assembly requirements. At the moment, this may make leasing more attractive than purchasing since every model is eligible no matter where it is made.
The previous general requirements (excepting final assembly), income limits, and price caps apply.
Used EVs and PHEVs Purchased or Financed in 2023
The maximum credit is 30 percent of the sale price, up to $4000. All previous general requirements apply except for final assembly, plus the new requirements listed below.
1. General Requirements
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
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: $75,000
Head of Household: $112,500
Married Filing Jointly and Surviving Spouses: $150,000
3. Price Caps
$25,000
New EVs and PHEVs Purchased or Financed in 2024
Beginning on January 1, 2024, the battery critical mineral requirement goes up to 50 percent and the battery component requirement is 60 percent. Also, no eligible battery can contain any components made in China, Russia, Iran, or North Korea. The components don't include minerals, which by 2025 will also have the same country restrictions. For any automaker producing batteries in China or sourced with Chinese materials, this rule will make such cars more expensive to consumers.
Better news: In 2024, buyers of vehicles eligible for the federal EV tax credit will be able to transfer the credits to the dealer itself in order to reduce the vehicle's sale price. This turns the tax credit into a rebate, which means you'll get $7500 right away.
Which New EVs and PHEVs Can I Purchase or Finance That Qualify for Tax Credits?
Check the EPA's frequently updated list of 2022 through 2024 new vehicles that are eligible if they meet price caps, and see if your vehicle is included and if so, how much of a tax credit you are entitled to.
Which Used EVs and PHEVs Can I Purchase or Finance That Qualify for Tax Credits?
This list is far more exhaustive. You can view it here.
How Do You Receive EV Tax Credits?
The process is fairly simple. After purchasing a qualifying vehicle, you file Form 8936with your tax return.
Individual States' EV Tax Credits
A handful of states offer their own EV tax credits, however, most incentivize the purchase of EVs, PHEVs, and—in the case of California—hydrogen fuel-cell vehicles with various other perks. Furthermore, individual counties and cities throughout the country offer additional incentives. The Department of Energy (DOE) maintains a database of the incentives each state offers for buyers of various alternative fuel vehicles.
Is EV Charging Tax Deductible?
The federal government no longer provides a tax credit related to the charging of an EV or PHEV. It previously offered a tax credit of up to $1000 for the installation of a home charger, but that incentive expired well before the IRA was passed. That said, the IRA does offer tax credits for the installation of commercial chargers.
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