The sale of battery-powered vehicles has surged across the United States, China, and Europe, while sales of conventional vehicles have stagnated. In 2021, electric car sales represented nearly 9% of global car sales, more than tripling their market share over two years. The Inflation Reduction Act (IRA) will invest $370 billion to cut carbon emissions and promote clean energy use, and this law has a major impact on EV tax credits.
That means eligible EV shoppers may qualify for up to $7,500 in federal tax credits plus potential state incentives. However, the tax credits are a bit complicated and change over time. So, let’s demystify how electric vehicle tax credits work, so you can take advantage of them and make an informed decision when you purchase an EV.
Editor’s note: We originally published this article on February 22, 2022, but updated it in October 2022 to reflect changes to the EV tax credits resulting from the Inflation Reduction Act.
The following is not tax advice; please consult with a tax expert to learn if you can benefit from an electric vehicle tax credit.
What Is a Tax Credit?
A tax credit is a dollar-for-dollar reduction in taxes owed to the federal government. For example, a $7,500 tax credit reduces federal income taxes owed to the IRS by $7,500. However, a tax credit has no value to the taxpayer if they have no tax liability. In other words, you must owe taxes to take advantage of it.
Sometimes, people confuse tax credits and tax write-offs, but they are not the same thing. A tax deduction or write-off decreases the total taxable income (not the total tax liability) by the given amount. Unlike with the tax credit, the value of a tax write-off varies based on your tax rate. Therefore, a $7,500 tax credit is more valuable than a $7,500 tax write-off.
You probably won’t see the benefits of your EV tax incentive right away. If you buy an EV in 2023, you can apply for the tax credit when you file for your taxes the following April by using IRS Form 8936.
Tax Credits for New EVs
Thanks to the Inflation Reduction Act, the $7,500 EV tax credit will remain in effect through 2032, and now more plug-in hybrid electric vehicles (PHEVs) qualify for the full $7,500 tax credit. There has been a limit on automakers that have met the 200,000 EV sales cap, which includes General Motors and Tesla. The IRA removes this limit, effective January 1, 2023. Soon, the Chevy Bolt, GMC Hummer pickup, Cadillac Lyric, and Tesla Model 3, S, X, and Y will likely qualify for a $7,500 EV tax credit (if they meet other qualifications).
EV Tax Credit Restrictions
The IRA will soon require the EVs and PHEVs to be assembled in North America to be eligible for the tax credit. Refer to the Department of Energy’s Alternative Fuels Data Center for a list of EVs that should meet the new assembly requirements.
Unfortunately, this can get complicated because even within a given model, the location where vehicles are assembled can vary. Therefore, we recommend using a VIN decoder to verify where the vehicle was assembled. In addition, there will also be new qualifications on where major vehicle components originate that even Tesla and General Motors might have difficulties meeting. And starting in 2024, there will be additional requirements for where the batteries are manufactured and where the materials originated.
In an effort to make the tax credits primarily available to people with low to moderate incomes, there are some additional restrictions. Soon, new electric SUVs, pickups, and vans cannot exceed $80,000, and sedans, wagons, hatchbacks, and other vehicles cannot exceed $55,000 to qualify. Also, there are personal income limits for qualifying for the EV tax credit of $300,000 for couples and $150,000 for individuals.
New Tax Credits for Used EVs
Used EVs didn’t previously qualify for the tax credit, even though preowned vehicles make up a majority of automotive sales in the US. However, effective January 1, 2023, some used EVs will be eligible for an EV tax credit of up to $4,000 or 30% of the vehicle’s cost, whichever is less.
But, the used EVs and PHEVs must be sold through a licensed auto dealer, sell for $25,000 or less, and have been in operation for at least two years. There are income caps to qualify, but they are $150,000 for joint filers or $75,000 for individuals. Also, the used EV tax credits won’t take effect until 2024.
What Types of Vehicles Qualify for the EV Tax Credit?
Two main types of passenger vehicles and light trucks meet the IRS criteria for the EV tax credit. Battery electric vehicles (BEVs) run purely on electricity. Plug-in hybrids can run purely off of electricity for a certain distance and then rely on an internal combustion engine powered by fossil fuels. Qualified BEVs and plug-in hybrids are eligible for the federal tax credit. However, non-plug-in hybrids are not eligible.
Do I Qualify for the EV Tax Credit?
The EV tax credit is a federal credit for income taxes owed to the IRS; you must owe enough taxes to take advantage of this opportunity. If you owe no income taxes to the IRS, then you can’t benefit from it.
Let’s say you buy an EV that qualifies for a $7,500 tax credit and you owe $3,000 in income taxes. You could receive a $3,000 credit on your income taxes. Note that the tax credit can’t be passed on to someone else, as only the original registered vehicle owner qualifies.
Are There State EV Incentives?
In addition to the federal electric vehicle tax credit, some states and utility companies offer EV incentives. To determine if programs exist in your area, refer to Tesla’s EV and solar energy incentive page. The perks for EVs vary widely and may include state tax or non-cash incentives, such as free municipal parking or access to car-pool lanes. There are also some utility rebates for installing Level II home chargers.
Editor’s note: We originally published this article on February 22, 2022, but updated it in October 2022 to reflect changes to the EV tax credits resulting from the Inflation Reduction Act.
Feature image courtesy of ANTONI SHKRABA