Your Guide to Electric Vehicle Tax Credits

Your Guide to Electric Vehicle Tax Credits

In 2010, the federal government implemented a program that offered up to $7500 in tax credits to buyers of electric vehicles. The purpose of the program was to incentivize people to buy more fuel-efficient vehicles by artificially bringing down the prices of EVs closer to those of internal combustion vehicles.

In the summer of 2022, the Inflation Reduction Act (IRA) dramatically changed the way the federal government incentivizes EVs. The 2010 rules had a sunset clause that phased out these credits for any automaker once it sold 200,000 units. The IRA does not include any limits on the number of EV tax credits for any specific automaker. That said, it does put an end date on the federal government’s EV tax credit incentive: December 31, 2032

EV buyers will find new benefits and some potential drawbacks in the new rules, which change much more than the number of eligible credits available to an automaker. Price and income limits were added, and used EVs can now qualify for a rebate. Additionally, the tax credits now factor in an EV’s final assembly location, as well as where the battery’s materials are sourced from.

How Do EV Tax Credits Work?

EV tax credits come from buying a vehicle with a battery propulsion system that can draw power from an external power source. The nonrefundable credits are available for battery-electric vehicles, plug-in hybrids (PHEV), and hydrogen fuel-cell vehicles (HFCV). The credits earned depend on a variety of factors and are used to decrease the taxes you owe in a given year. 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 $1000 to the government.

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The number of credits, or tax incentives, an EV can qualify for depends on the capacity of its battery pack. If a battery-electric or plug-in hybrid vehicle has a battery with a capacity of less than 7.0 kWh, then it does not qualify for any EV tax credits. Vehicles can qualify for up to $7500 in tax credits, and all HFCVs are eligible for the full amount.

Which Vehicles Qualify for EV Tax Credits?

The IRA introduces a number of changes to federal EV tax credit laws. One of the biggest is that the final assembly of qualifying vehicles now has to take place in North America. This part of the IRA went into effect when President Biden signed the law on August 16, 2022. The Department of Energy has published a list of around 30 models with final assembly in North America.

The problem, as the IRS readily admits, is that this list is somewhat unreliable. This is because some automakers build the same vehicle at multiple factories in various locations. Due to this, it’s important that you check the VIN of the specific vehicle you’re looking at to confirm it was assembled in North America.

The majority of the IRA’s changes to the EV tax credit system take effect at the start of 2023. This includes price caps on qualifying vehicles (up to $55,000 for new cars and $80,000 for new trucks and SUVs) and an income ceiling that limits who can claim the credit.

Single and separate tax filers are capped at $150,000, those who file as a head of household are capped at $225,000, and joint filers and surviving spouses are capped at $300,000. These figures are halved for individuals looking to claim the $4000 tax credit for a used EV, PHEV, or HFCV.

Eligible used vehicles cannot cost more than $25,000 and have to be at least two years old to nab the EV tax credit. Additionally, an eligible vehicle can only qualify for the credit once in its service life. There’s no getting around this, either, as those claiming the credit on an eligible vehicle has to include the VIN on their tax return.

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The start of 2023 will also bring about additional eligibility requirements related to the source of certain materials used in the battery pack of a given EV or PHEV. Critical minerals used in the manufacturing of these batteries will have to be extracted or processed in the United States or within a country that has a free-trade agreement with the U.S. Minerals recycled in North America also make the cut.

The battery packs of vehicles put into service before January 1, 2024, will need at least 40 percent of their mineral materials to be sourced in this manner. Later in 2024, this figure rises to 50 percent, with each subsequent year adding an additional 10 percent to this equation, ultimately topping out at 80 percent for vehicles placed in service after December 31, 2026, to qualify for the EV tax credit.

From the beginning of 2023 until January 1, 2024, the federal government will require new EVs and PHEVs to have half the value of their battery pack come from components manufactured or assembled in North America to qualify for the tax credit. This figure rises to 60 percent, and then subsequently rises by 10 percent per calendar year until the entire value of the battery pack of a vehicle placed into service after December 31, 2028, comes from components manufactured or assembled in North America.

How Do You Receive EV Tax Credits?

The process is fairly simple. After purchasing a qualifying vehicle, you fill out form 8936 along with your tax return. It is important to note that the EV tax credits are nonrefundable. This means the credits can only be applied to the taxes you owe in a given year. If you received more in credits than you owe in taxes, you will not receive the difference. The credits do not roll over, either.

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You cannot qualify for EV tax credits if you lease an eligible vehicle. This is because the manufacturer still technically owns the vehicle. Nonetheless, manufacturers can qualify for and receive the entirety of an eligible vehicle it leases out. In the pre-IRA days, it was not uncommon for manufacturers to factor this into the lease, allowing lessees of eligible vehicles to indirectly benefit from the EV tax credit. We expect this practice to continue.

Beginning 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. In the past, buyers paid full price for the vehicle and only saw the effects of the EV tax credit after submitting their taxes.

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—HFCVs 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.

EV Tax Credits by Brand

Specific EV tax credit information related to individual EVs and PHEVs under the IRA is currently unavailable. Details will surely emerge once manufacturers submit the required information to the government that’s needed to assess their individual battery-electric and plug-in hybrid vehicles’ eligibility for EV tax credits under the new rules.