Electric Vehicle Tax Credit: Rules and Qualifications for Clean Vehicle Purchases

The Inflation Reduction Act of 2022, one of the most ambitious pieces of climate legislation in U.S. history, aims to make electric vehicles a little more attainable.

The measure, signed into law by President Biden on Aug. 16, 2022, allocated over $369 million dollars for climate action, with a portion of the budget dedicated to tax credits for electric vehicle purchases.

Enhancements to the electric vehicle credit could potentially save taxpayers up to $950 per year, according to the White House. But understanding these changes can also be daunting — new manufacturing guidelines, income thresholds, and pricing caps abound.

Making matters murkier is the Treasury Department’s real-time deliberations over how and when some of these requirements will come into play. For example, on March 31, 2023 — three months into the new tax year — the IRS finally released updated guidance on key battery and critical mineral sourcing rules.

Here's what you need to know about the federal tax incentives for electric vehicles, a summary of changes courtesy of the legislation, and an overview of which cars may qualify for the new credit according to the IRS.

What is the electric vehicle tax credit?

The electric vehicle tax credit, or the EV credit, is a nonrefundable tax credit offered to taxpayers who purchase qualifying plug-in electric or “clean” vehicles.

For tax year 2022 (taxes filed in 2023), the EV tax credit ranges from $2,500 to $7,500, and eligibility depends on the vehicle’s weight, how many cars the manufacturer has sold and whether you own the car.

The Inflation Reduction Act, or IRA, made several changes that, for the most part, affect vehicles purchased from 2023 through 2032. Among the new elements added are manufacturing requirements, income thresholds and expanded eligibility for certain types of cars.

The enhanced tax benefit allows for a maximum credit of $7,500 for new EVs, and up to $4,000, limited to 30% of the sale price, for used EVs.

» Curious about other tax incentives for going green? How the solar tax credit works.

How does the 2022 EV tax credit work?

If you purchased and received delivery of an EV in 2022, and you plan to claim the credit when you file your return in 2023, most of the old rules still apply. Here’s a recap of how the credit works for the 2022 tax year:

• The credit is worth $2,500 to $7,500, depending on the car’s battery capacity.

• Credits are reduced and eventually phase out after a manufacturer sells 200,000 qualifying vehicles. This makes EVs from Tesla and GM ineligible.

• You must own the car. Used or leased cars don’t qualify.

• The car must weigh less than 14,000 pounds.

• The credit is nonrefundable; it can lower your tax bill to zero, but it won’t result in a refund.

EV tax credit final assembly requirement

One important exception is the “final assembly” requirement ushered in by the IRA. Clean vehicles that were purchased and delivered from Aug. 16, 2022, to Dec. 31, 2022, must have had their final assembly in North America to meet the eligibility criteria.^[0]

To see cars that likely qualified through the end of 2022, you can reference this list compiled by the U.S. Department of Energy.

And, importantly, if you already entered into what the IRS calls a “binding written contract” to purchase an EV before Aug. 16, 2022, and expect the car to be delivered at a later date, you’re likely able to claim the credit without meeting this new final assembly requirement. ^[0]

Claiming the EV tax credit

To claim the credit, taxpayers can file Form 8936 when they file their federal income taxes.

EV tax credit: 2023 through 2032

The changes to the clean vehicle tax credit listed below went into effect in January 2023, with the exception of the battery rules, for which the IRS released updated guidance on March 31.

Here's a breakdown of how the revamped tax credit will work for clean vehicles purchased in 2023.

Enhanced credit

The most significant change to the EV tax credit is its extension. The credit was revived for another nine-year period, allowing taxpayers with eligible cars to take advantage of it from 2023 to 2032. Taxpayers can only claim one credit per vehicle.

Lifted manufacturing cap

The IRA also made several adjustments to manufacturing limits that previously hampered eligibility for the credit if you bought a car from a manufacturer, such as Tesla, that had sold more than 200,000 qualifying vehicles. Beginning in 2023, manufacturing caps will be lifted.

Used cars now eligible

One of the most contentious issues with the older version of the EV tax credit was its exclusion of used cars. The IRA remedies this. Beginning in 2023, qualifying used EV purchases can fetch taxpayers a credit of up to $4,000, limited to 30% of the car’s purchase price.

Some other qualifications:

• Used car must be plug-in electric or fuel cell.

• Only qualifies for the first transfer of a vehicle.

• Purchase price of car must be $25,000 or less.

• Car model must be at least 2 years old.

• Credit can only be claimed once every three years. ^[0]

  Internal Revenue Service. Used Clean Vehicle Credit. Accessed Mar 31, 2023.

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Price cap

The IRA also institutes price caps for eligible vehicles. Beginning in 2023, vans, SUVs and pickup trucks must have an MSRP, or manufacturer's suggested retail price, of $80,000 and under to qualify. Other vehicles, such as sedans and passenger cars, are capped at $55,000. For used vehicles, the price cap drops to $25,000.

For new vehicles, the MSRP, as defined by the IRS, is the base retail price provided by the manufacturer plus the retail price of each accessory or optional piece of equipment that is physically present on the car at the time of delivery to the dealer. For purposes of claiming the credit, MSRP does not include taxes and other fees added on by the dealer. ^[0]

Income eligibility cap

Along with price caps on cars, the new credit also sets limits on the modified adjusted gross income that taxpayers can make in order to qualify.

Per the IRS, you can use your MAGI from either the year the car is delivered, or the year prior to delivery.^[0]

New Cars

Used Cars

If your income precludes you from qualifying, there are also several tax strategies you can consider to lower your income throughout the year, such as maxing out your 401(k) or contributing to an HSA or FSA.

Final assembly requirements

To be eligible for the new credit, vehicles must have had final assembly in North America. You can reference the National Highway Traffic Safety Administration’s VIN, or vehicle identification number, database to check out a car’s final assembly details.

New battery and sourcing requirements

The new credit, worth up to $7,500, is made up of battery and sourcing requirements, each adding up to half of the credit. Per the IRS, the requirements below apply to vehicles that are delivered (i.e., “placed in service”) to the taxpayer on and after April 18, 2023. ^[0]

Jump below to see how the credit is calculated for clean vehicles placed in service on April 17, 2023, or earlier.

Battery requirement: To be eligible for the battery portion of the credit (up to $3,750), a certain percentage of the vehicle’s battery must be assembled or manufactured within North America. The percentage thresholds will be as follows:

• 2023: 50%

• 2024: 60%

• 2025: 60%

• 2026: 70%

• 2027: 80%

• 2028: 90%

• 2029 through 2032: 100%

Critical minerals requirement: Cars must meet a "critical minerals requirement" to receive the remaining $3,750 portion of the credit. This requirement stipulates that a certain percentage of critical minerals in the car's battery must be extracted or processed within the U.S. or within a country with whom the U.S. has a free-trade agreement. The percentage thresholds will be as follows:

• 2023: 40%

• 2024: 50%

• 2025: 60%

• 2026: 70%

• 2027 through 2032: 80%

Beginning in 2024, vehicles may also not source battery parts from a foreign country of concern (e.g., China). And starting in 2025, EVs cannot contain any critical minerals sourced from a foreign country of concern.

EVs delivered prior to April 18, 2023

If your qualifying EV was purchased and delivered before April 18, 2023, the critical minerals and battery sourcing requirements do not apply. Instead, the credit amount is calculated as $2,500 if the battery has at least a 7-kilowatt-hour capacity, plus up to $5,000 for additional kilowatt hours above the base requirement of 7 kilowatt hours. ^[0]

Credit flexibility

Beginning in 2024, taxpayers will have the option to transfer the credit to the dealer at the point of sale to directly lower the price of the vehicle by the corresponding credit amount — this is huge news for folks who may want to invest in an EV but have been dissuaded by high sticker prices. Taxpayers can expect further guidance on how the transfer of the credit will work from the IRS and the Department of Treasury in the coming months.^[0]

Which vehicles qualify for a 2023 tax credit?

The enforcement of the critical mineral and battery sourcing requirements will likely limit the number of qualifying vehicles that are eligible for the credit. The IRS urges taxpayers to review the list on the FuelEconomy.gov website to see which cars potentially qualify for the new credit.

The IRS also has a list of new and used clean vehicles that may be eligible based on information submitted by the manufacturers. Per the agency, the lists will be periodically updated with new additions.

• New clean vehicles

• Used clean vehicles

Keep in mind that, according to the agency, you generally can only claim the clean vehicle tax credit for the tax year the vehicle was delivered to you, not necessarily the year it is purchased.^[0]

This means, for example, that if you bought a qualifying EV in 2023 but didn't receive it until 2024, you must claim the credit on your 2024 taxes (filed in 2025). If you purchase a qualifying vehicle in 2023 and it is delivered during the same calendar year, you can claim the tax credit on your 2023 taxes (which you'll file in 2024).

What information do you need from a seller to claim the credit?

Before you leave a dealership with a new EV, make sure you have certain documents that you’ll need to claim the credit on your taxes. Sellers must provide taxpayers with a report containing certain information about the vehicle —  and this report should be furnished to the taxpayer by the date of the vehicle’s purchase. Make sure it includes the following:

• Name and taxpayer identification number (TIN) of the seller.

• Name and TIN of the taxpayer.

• Date of sale and sales price.

• Verification of the maximum tax credit the vehicle is eligible for. 

• The clean vehicle’s VIN, or vehicle identification number.

• The clean vehicle’s battery capacity. 

• Verification that the taxpayer is the original user of the vehicle.

• A statement of declaration from the seller under penalty of perjury. ^[0]

  Internal Revenue Service. Topic B — Frequently Asked Questions About Income and Price Limitations for the New Clean Vehicle Credit. Accessed Mar 31, 2023.

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EV rebates and incentives

With all the focus on credits, it’s important to know about additional incentives on the state and local levels. California’s Clean Air Vehicle program, for example, grants carpool lane access to select electric vehicles. And New Yorkers might be eligible for a state-level rebate of up to $2,000 on top of the federal tax credit.

Make sure you’re aware of any restrictions that come with applying for multiple incentives, though. Some states may not allow you to “double-dip” or claim a state-level rebate on top of a federal one.

» Interested in building a more ethical portfolio? Consider ESG investing

A final note