Electric Vehicle Tax Credit 2024: A Complete Guide
Electric vehicles (EVs) have become popular because of their environmental benefits and potential cost savings. To encourage the adoption of EVs, the U.S. government offers tax credits to individuals who purchase qualifying electric or plug-in hybrid vehicles. As of 2023, people who buy new electric vehicles may be eligible for a tax credit as high as $7,500, while used EV buyers can qualify for up to $4,000 in tax breaks. This comprehensive article will explore the rules and qualifications for claiming the EV tax credit, how the tax credit is calculated, and the steps to claim the credit on your federal income taxes.
What is the Electric Vehicle Tax Credit?
The electric vehicle tax credit, or EV credit, is like a discount the government gives you when you purchase an electric or plug-in hybrid car. It’s not cash back, but it can reduce how much you owe in taxes. You can get a maximum discount of $7,500 for new electric cars. If you buy a used electric car, the discount is up to $4,000, limited to 30% of the sale price, but it can’t be more than 30% of the car’s price. You can only get a discount for one car. Starting in 2024, you can use this discount directly at the car dealership to make the car cheaper by the discount amount. This way, more people can take advantage of the savings when buying an electric car.
How the 2023 EV tax credit works
To qualify for the revised EV tax credit, your income must meet set thresholds, and the chosen vehicle must adhere to IRS specifications, including price limits and manufacturing criteria. Changes began in January 2023, except for rules on critical minerals and batteries, which took effect on April 18, 2023.
Used EVs are now eligible.
A major point of contention in the previous iteration of the EV tax credit was its exclusion of used cars. The IRS addresses this issue by introducing changes. Starting in 2023, for the first time, taxpayers can now claim a credit of up to $4,000 for qualifying used EV purchases, limited to 30% of the vehicle’s purchase price.
Price cap
Starting in 2023, vans, SUVs, and pickup trucks qualify for the credit if their MSRP is $80,000 or less. Sedans and passenger cars are capped at $55,000, and used vehicles must be under $25,000. The IRS defines MSRP for new vehicles as the base price set by the manufacturer plus the retail cost of accessories. Note that for claiming the credit, MSRP excludes dealer-added taxes and fees. The new rules also consider buyer income as a criterion for qualifying for the tax credit. The tax credit sets limits on vehicle price and buyer income to qualify.
Income limit
The recent tax credit limits vehicle prices and sets caps on taxpayers’ modified adjusted gross income (MAGI) for eligibility. According to the IRS, you can use MAGI from the year you receive the car or the year before delivery. This means you may still qualify if your income exceeds the threshold in one year but falls below the cap in the other year. Additionally, a taxpayer’s eligibility for the tax credit may be limited by thresholds for modified adjusted gross income (modified AGI); only individuals having a modified AGI below the following thresholds for the current tax year or the prior tax year are eligible for the tax credit.
New EVs
- The maximum credit for new EVs is $7,500.
- Vans, SUVs, and pickup trucks must have a manufacturer’s suggested retail price (MSRP) of $80,000 or under to qualify.
- The MSRP for sedans and passenger cars is limited to $55,000.
- The vehicle must have had a final assembly in North America.
Used EVs
- Buying a used electric vehicle (EV) can get you a discount of up to $4,000, capped at 30% of the car’s price.
- The used vehicle must be a plug-in electric or fuel cell with at least a 7-kilowatt-hour battery capacity.
- The credit is applicable only for the initial transfer of the vehicle.
- The purchase price of the car must not exceed $25,000.
- The car model must have a minimum age of two years.
- The weight of the vehicle must be less than 14,000 pounds.
- You can only claim the credit once every three years.
If your income makes you ineligible, you can consider alternative tax strategies to lower your income throughout the year. This may include maximizing your contributions to a 401(k) or contributing to an FSA or HSA.
Battery and Sourcing Requirements
The calculation of the EV tax credit depends on battery and sourcing requirements. Divide this credit into two portions: the battery portion and the sourcing portion. Here’s how you calculate the credit:
Battery Portion
To qualify for the credit related to the battery, a specific percentage of the vehicle’s battery must undergo assembly or manufacturing within North America. The percentage thresholds for the battery portion are as follows:
- 2023: 50%
- 2024: 60%
- 2025: 60%
- 2026: 70%
- 2027: 80%
- 2028: 90%
- 2029 through 2032: 100%
Sourcing Portion
The sourcing portion of the credit depends on the percentage of critical minerals in the car’s battery sourced from the U.S. or a country with a free-trade agreement. The percentage thresholds for the sourcing portion are as follows:
- 2023: 40%
- 2024: 50%
- 2025: 60%
- 2026: 70%
- 2027 through 2032: 80%
In addition, starting in 2024, EVs cannot source battery parts from foreign countries of concern, such as China. From 2025 onwards, EVs cannot contain any critical minerals sourced from foreign countries of concern.
2024 EV Tax Credit Flexibility
From January 1, 2024, taxpayers might have the choice to transfer the clean vehicle tax credit to the dealer during the point of sale. This proposal aims to simplify access to the tax break for all eligible consumers, not just those with significant tax liability. By transferring the credit to the dealer, eligible consumers can reduce the vehicle’s cost by the equivalent credit amount or receive a cash equivalent.
In order to participate in the program, dealerships need to register with Energy Credits Online. This online system helps them confirm if a vehicle meets the eligibility requirements. However, consumers must still ensure they meet the income criteria for the credit. If someone receives the rebate but is later discovered to be ineligible, they’ll have to repay the IRS when filing their tax return.
It’s important to note that the proposal is undergoing a public commentary period, and further guidance from the IRS is expected in the coming months.
Qualifying Vehicles for the EV Tax Credit
To help you determine which vehicles qualify for the EV tax credit in 2023, we have compiled a list of eligible fully electric and plug-in hybrid vehicles. This list is based on information available as of August 28, 2023, and may not be exhaustive. It’s always a good idea to consult 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 and make to determine which car is eligible based on its date of delivery. Here are a few examples:
Car Make and Model | Tax Credit Amount | MSRP Limit
BMW X5 xDrive50e (2024) | $3,750 | $80,000
Cadillac Lyriq (2023-2024) | $7,500 | $80,000
Chevrolet Blazer (2024) | $7,500 | $80,000
Chevrolet Bolt (2022-2023) | $7,500 | $55,000
Chrysler Pacifica PHEV (2022-2024) | $7,500 | $80,000
Ford F-150 Lightning (2022-2023) | $7,500 | $80,000
Tesla Model 3 Standard Range RWD (2022–2023) | $7,500 | $55,000
Volkswagen ID.4 Pro (2023) | $7,500 | $80,000
Keep in mind that this list may change, so it’s crucial to confirm whether a particular vehicle is eligible before making a purchase.
How to Claim the EV Tax Credit
To claim the EV tax credit, you must file Form 8936 when you file your federal income taxes. The credit is nonrefundable, meaning it can eliminate or lower taxes owed but will not result in a refund. Here are the steps to claim the EV tax credit:
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- Gather the necessary information: Before leaving the dealership with your new EV, make sure you have the following documents to claim the credit on your taxes:Name and (TIN) taxpayer identification number of the seller
- TIN and Name of the taxpayer
- Verification of the maximum tax credit for which the vehicle is eligible.
- Date of sale and sales price
- The clean vehicle’s vehicle identification number (VIN)
- The clean vehicle’s battery capacity
- A statement declaration from the seller, made under penalty of perjury.
- File Form 8936: Include all the required information on Form 8936, including the vehicle purchase details and the calculated federal tax credit amount.
- Claim the credit on your tax return: If you purchased a qualifying EV in the same tax year it was delivered, you can claim the tax credit on your tax return. If the delivery of the vehicle falls in the following tax year, you must claim the credit on the tax return for that year.
- Name and (TIN) taxpayer identification number of the seller
- TIN and Name of the taxpayer
- Verification of the maximum tax credit for which the vehicle is eligible.
- Date of sale and sales price
- The clean vehicle’s vehicle identification number (VIN)
- The clean vehicle’s battery capacity
- A statement declaration from the seller, made under penalty of perjury.
Additional Incentives and Rebates
In addition to the federal EV tax credit, many states and local governments provide additional incentives and rebates for purchasing electric vehicles. These incentives can further reduce the cost of owning an EV and vary by location. For example, California’s Clean Air Vehicle program grants carpool lane access to select electric vehicles. New York extends a state-level rebate of up to $2,000 in addition to the federal tax credit. It is important to note that certain requirements need to be met for battery components of electric vehicles, such as anodes, cathodes, and electrolytes, to be manufactured or assembled in North America. Additionally, battery components cannot come from companies controlled by China, starting this year.
Researching and exploring the incentives and rebates available in your area is important to maximize your savings when purchasing an electric vehicle. However, be aware of any restrictions on claiming multiple incentives to avoid double-dipping.
Leasing and the EV Tax Credit
While individual consumers cannot directly claim the EV tax credit when leasing an electric vehicle, the dealer may pass down potential savings. Leased cars are considered commercial vehicles owned by the businesses that purchase them, such as dealerships and leasing agencies. These businesses can qualify for a different type of tax credit, known as the commercial vehicle tax credit.
The commercial vehicle tax credit is more flexible than the individual EV tax credit, enabling businesses to qualify for incentives on a broader range of eligible electric vehicles, including those not made in the U.S. Dealerships, though receiving the tax credit, can lower leasing costs for the lessee by the credited amount. Additionally, automakers are adjusting their supply chains to ensure buyers continue to be eligible for the new clean vehicle credit, partnering with allies and bringing jobs and investment back to the United States.
Note that dealerships aren’t obligated to discount leases, so negotiating may be necessary to realize potential savings. Also, it’s crucial to assess the transparency of any lease claiming to pass down savings and thoroughly research leasing options before deciding.
Conclusion
The 2023 EV tax credit allows businesses and individuals to reduce electric vehicle purchase costs. With used EVs included and higher credit amounts for new ones, more people can benefit, contributing to a greener future. Understand eligibility, vehicle specs, and the claiming process for an informed decision and maximum savings. Consult a certified tax professional for personalized guidance, and enjoy the perks of owning an electric vehicle while supporting sustainability.
FAQs
What is the electric vehicle tax credit and how does it work?
The electric vehicle tax credit is a federal tax credit available to individuals who purchase new electric vehicles. It works by reducing the amount of taxes owed to the IRS by the credit amount, which varies depending on the vehicle’s battery capacity and manufacturer.
How much money can I save with the electric vehicle tax credit?
The electric vehicle tax credit allows you to save up to $7,500 on your federal income tax return. The credit amount varies based on the capacity of the battery used in the vehicle. It’s important to check with the IRS and consult a tax professional for specific details and eligibility requirements.
Can I get the electric vehicle tax credit if I lease an electric car?
Yes, you can still qualify for the electric vehicle tax credit if you lease an electric car. However, in most cases, the tax credit goes to the leasing company, which then factors it into your lease payments. It’s always best to consult with a tax professional for specific eligibility and requirements.
Is there a limit to how many times I can claim the electric vehicle tax credit?
No, there is no limit to how many times you can claim the electric vehicle tax credit. As long as you meet the eligibility criteria for each tax year, you can claim the credit for each electric vehicle you purchase during that time.
Do Used EVs Qualify for a Tax Credit?
No, used electric vehicles do not qualify for the federal tax credit. The tax credit is only available for new electric vehicle purchases. However, there may be state or local incentives for used electric vehicles, so it’s worth checking with your local government or tax authority.
