Electric Vehicle Tax Credits

The Inflation Reduction Act of 2022 renewed and revamped the Clean Vehicle Credit, which now allows taxpayers to reduce their tax bill by up to $7,500 on new electric cars and $4,000 on used electric cars, provided certain requirements are met. This credit has been extended until at least 2032.

The rules, to say the least, are complicated. The U.S. government is trying hard to prevent US tax credits from going to foreign manufacturers that don’t make the cars and/or components here in the United States. The IRS frequently updates these regulations, but we’ve summarized them here.

What is the credit amount?

For new vehicles, the $7,500 credit is split into two parts:

• The critical minerals component specifies what percentage of critical minerals must be extracted or processed in the US or select other countries and is worth $3,750.
• The battery component specifies what percentage of battery parts must be manufactured or assembled in North America and is worth $3,750 as well.

Vehicles can meet one or both requirements.

For used vehicles, the credit is $4,000 or 30% of the vehicle’s sales price, whichever number is lower.

These credits are non-refundable and cannot carry forward, meaning the credit can only be taken up to the amount of tax owed in the year the owner takes possession of the car. If no tax is owed, the credit cannot be used in another tax year (though special rules do apply if the vehicle is claimed for business use).

Who can claim a credit?

Taxpayers who bought and received EVs in 2022, with the the following provisions:

• No credits are given for EVs from Tesla and GM, as the 2022 rules precluded manufacturers that had already sold 200,000 cars.
• Used cars do not qualify.
• For cars purchased between August 17, 2022 and year end, final assembly must have occurred in North America.
• If you entered into a binding contract before August 16, 2022, you may still qualify for the credit.

Taxpayers who bought and received EVs in 2023, with the following provisions:

• For cars purchased between January 1, 2023 and April 18, 2023, the critical minerals and battery sourcing requirements, as noted above, do not apply.
• For cars bought after April 18, 2023, the critical mineral and battery sourcing rules apply, but those rules are phased in over time. In 2023, at least 50% of the battery and 30% of the critical minerals must be sourced in North America. The percentage increases by 10% each year until it reaches 100% for battery and 80% for critical minerals.

Taxpayers who wish to receive this credit for new vehicles in 2023 must fall under certain income thresholds. Married persons filing jointly, qualifying surviving spouses, or qualifying widows/widowers must not have a modified adjusted gross income (MAGI) that exceeds $300,000. The number for heads of household is $225,000, and all other taxpayers must not exceed $150,000 MAGI.

For those wishing to purchase qualifying used vehicles, the income limits are cut in half:

• Joint filers and surviving spouses – MAGI of $150,000 or less
• Heads of household – $112,500
• All other taxpayers – $75,000

Which vehicles qualify?

The rules for new vehicles emphasize that final assembly must occur in North America and stipulate several additional component-sourcing, vehicle weight, and battery capacity requirements. Price limits apply as well. For vans, sport utility vehicles, and pickup trucks, MSRP (manufacturer’s suggested retail price) cannot exceed $80,000. For all other vehicles, the figure is $55,000. Note that MSRP, rather than the final purchase price, is used to determine eligibility. An SUV with an MSRP of $85,000 will not be eligible even if the purchaser works out a lower sale price with the dealer. Taxes and delivery fees are not included in MSRP.

Used vehicles must be purchased from a dealer, made by a qualified manufacturer, have a sale price of $25,000 or less, and must have a model year two years prior to the current calendar year in order to qualify.

For both new and used vehicles, the dealer will provide a report at the time of sale with critical information including dealer details, the final sales date and price, and the vehicle’s VIN number. The dealer will file with the IRS, and the purchaser will also need to fill out Form 8936 at tax time.

The easiest way to find out whether a vehicle qualifies is to search fueleconomy.gov, an official site the U.S. Department of Energy updates on a regular basis. You can also search cars by VIN number on the U.S. Department of Transportation site: https://www.nhtsa.gov/vin-decoder.

Are the rules different if I lease?

As of this writing, the Inflation Reduction Act created a “qualified commercial clean vehicles credit.” The way a lease typically works is the finance arm/bank buys a car and then leases it to a consumer. Because the car owner is a commercial entity, it qualifies for the tax credit, and qualifying rules (battery/critical minerals/income, etc.) don’t apply. Most owners are passing the credit on to car lessors, which they aren’t required to do but use as an advertising tactic. The practice is likely to come under IRS scrutiny, but as of now it works.

Is anything changing in 2024?  

The main rule that will change in 2024 is that dealers will be able to give the credit to consumers at the time of purchase versus when the taxpayers file their tax returns. This change will immediately reduce the vehicle’s price, thereby decreasing monthly payments and/or encouraging EV adoption. What we’re not entirely sure about is how the dealers will qualify customers who make too much or don’t have enough tax for the credit and if there will be a claw-back. Only time will tell!

We realize these rules are complex and constantly changing, but we have summarized the current rules as of April 2023 here. Please reach out to us with any questions you may have.