Beatrice Lang
The electric vehicle tax credit is a federal tax benefit for those who purchase qualifying new or used electric vehicles. The credit is designed to encourage the purchase of electric vehicles (EVs), plug-in hybrids, or hydrogen-powered cars. To qualify for the credit, you must meet certain income requirements and buy a vehicle that meets the price, battery, and assembly restrictions. The latest version of the clean vehicle tax credit was signed into law with the Inflation Reduction Act and carries changes that began in 2023 and will continue through 2032.
| Characteristics | Values |
|---|---|
| Vehicle type | New or used electric vehicles, plug-in electric vehicles, or fuel cell vehicles |
| Vehicle assembly | Must be assembled in North America |
| Battery components | At least 60% of the battery's components must be manufactured or assembled in North America; this figure rises to 100% by 2029 |
| Price | The maximum price for qualifying cars is $55,000, according to Kelley Blue Book; the manufacturer's suggested retail price (MSRP) can't exceed $80,000 for vans, sport utility vehicles, and pickup trucks |
| Income | Income must fall beneath certain thresholds, depending on tax filing status |
| Credits | Up to $7,500 for certain new vehicles and up to $4,000 for some used ones; the credit can be claimed on a tax return or transferred to a dealer for an immediate discount |
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What You'll Learn
Income requirements
To qualify for the electric vehicle tax credit, you must meet certain income requirements. These income requirements are subject to limits between $150,000 and $300,000, depending on your tax filing status. If your income surpasses these thresholds, you will not qualify for any federal EV tax credits.
The income caps are irrelevant if you are leasing an electric vehicle, as there is no purchase involved. However, there is no obligation for the automaker to pass on any savings to you, although many offer discounts on EV leases as a direct result of this loophole.
The amount of the tax credit you receive also depends on when you placed the vehicle in service (took delivery) rather than the purchase date. The minimum credit is $3,751 ($2,500 + 3 times $417), and the credit amount for a vehicle with the minimum 7 kilowatt-hours of battery capacity.
You can choose to claim the credit on your taxes or transfer it to an eligible dealer for an immediate discount on the vehicle at the point of purchase.
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Price caps
The price caps for the electric vehicle tax credit are based on the vehicle's manufacturer's suggested retail price (MSRP). The price caps are as follows:
- $55,000 for cars, wagons, and hatchbacks
- $80,000 for SUVs, pickup trucks, vans, and light trucks
These price caps are based on the vehicle's MSRP, not its sale price, so a heavily discounted luxury car would not qualify. For example, a vehicle with an MSRP of $79,990 but a destination fee that brings the total price over $80,000 would still be eligible for the tax credit. However, if a vehicle's MSRP is above the cap and is discounted to the cap amount through manufacturer incentives, it would not be eligible.
The price caps for the electric vehicle tax credit are subject to change and have been revised over time. For example, in 2023, the Treasury used the CAFE rules (corporate average fuel economy standard) to determine vehicle eligibility, which resulted in some vehicles being classified as qualifying for the $55,000 price cap instead of the $80,000 cap. However, this classification confusion was later addressed, and the Treasury reissued vehicle MSRP limits based on the EPA Fuel Economy Labelling standard.
In addition to the price caps, there are also income caps for buyers to be eligible for the electric vehicle tax credit. The income limits vary depending on the buyer's filing status and are as follows:
- $150,000 for single filers or married filing separately
- $225,000 for the head of household
- $300,000 for married filing jointly
It is important to note that the income limits are lower for buyers of used electric vehicles. The income caps for used EV buyers are as follows:
- $150,000 for joint filers
- $112,500 for the head of household
- $75,000 for individuals
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North American assembly
The final assembly in North America, including the US, Canada, and Mexico, is a prerequisite for the federal EV tax credit. This rule, which came into effect on August 16, 2022, affects vehicles purchased through 2032. It is worth noting that this requirement may not apply to some leased vehicles, and dealers are not obligated to pass on any savings to the consumer.
To qualify for the full $7,500 federal EV tax credit, the vehicle must meet additional criteria regarding critical minerals and battery components, each worth $3,750. The percentage of critical minerals and battery components sourced from North America will increase annually, with a 100% requirement by 2029.
The North American final assembly requirement is an initial step toward identifying vehicles eligible for the Clean Vehicle Credit. However, it is important to note that further conditions for eligibility may apply, depending on the purchase date.
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Battery components
To qualify for the electric vehicle tax credit, there are several requirements that need to be met, including income limits, vehicle assembly standards, and battery component specifications. This response will focus on the battery component requirements.
Firstly, it is important to understand the basic structure of an EV battery. An EV battery consists of four primary components: the positive electrode, known as the cathode; the negative electrode, called the anode; a micro-permeable separator that maintains the distance between the two electrodes; and an electrolyte. These components are assembled into cells, which are then combined into modules and eventually formed into battery packs that can be installed in electric vehicles.
The battery component requirements for the electric vehicle tax credit vary depending on the year. For 2025, at least 60% of a clean vehicle's battery components must be manufactured or assembled in North America. This percentage will increase to 100% by 2029. Additionally, a certain percentage of the critical battery minerals must be sourced from the United States or countries with a free-trade agreement with the U.S. to qualify for the tax credit.
The specific battery components that are considered in the tax credit requirements include the physical parts of the battery as well as the chemical compositions that generate electrical energy. EV battery components play a vital role in the proper functioning, energy distribution, and safety of electric vehicles. Some additional components, such as a battery busbar, can be included to improve performance and prevent overheating.
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Claiming the credit
If you choose to claim the credit on your tax return, you can receive a tax credit of up to $7,500 for a new electric vehicle and up to $4,000 for a used one. To do this, you need to file Form 8936, Clean Vehicle Credits, with your tax return. You will need to provide your vehicle's VIN (Vehicle Identification Number). The VIN can be found on the vehicle's window sticker or by using the National Highway Traffic Safety Administration's VIN Decoder tool.
If you choose to transfer the credit to a dealer, you can reduce the clean vehicle's upfront purchase price by the amount of the credit. This option is available to buyers as of January 1, 2024, and requires the dealer to submit information to the IRS through IRS Energy Credits Online to determine the vehicle's eligibility and the amount of the credit. The dealer must provide the buyer with a copy of the IRS's approval of their submission.
It is important to note that the eligibility for the credit depends on specific criteria, including income limits, vehicle assembly standards, and battery component requirements. The vehicle must be assembled in North America, and at least 60% of the battery's components must be manufactured or assembled in North America as well. Additionally, there are price caps on the vehicle's manufacturer's suggested retail price (MSRP), which vary depending on the type of vehicle.
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Frequently asked questions
The clean vehicle tax credit is a federal tax benefit for those who purchase qualifying new or used electric vehicles. It offers up to $7,500 for certain new vehicles and up to $4,000 for some used ones.
To qualify for the credit, you must meet the income requirements and buy a vehicle that meets the price, battery, and assembly restrictions. The vehicle must be assembled in North America, and at least 60% of the battery's components must be manufactured or assembled in North America.
You can claim the credit on your tax return, reducing your tax bill by either $7,500 for a new vehicle or $4,000 for a used vehicle. Alternatively, you can transfer your clean vehicle credit directly to a car dealer, lowering your vehicle's purchase price.
Beginning in 2024, dealers must submit information to the IRS through IRS Energy Credits Online to determine vehicle eligibility and the amount of the Clean Vehicle Credit at the point of sale. The dealer must provide the buyer with a copy of the IRS's approval of the submission.
You can use the tool on the FuelEconomy.gov website for the most up-to-date information on eligible models. You can filter by purchase scenario, model year, and vehicle type to determine which car is eligible based on its date of delivery.
