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 — or at least that’s the hope in the long run.

The bill, 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 enhancing tax credits for energy-efficient home improvements and electric vehicle purchases.

These expansions have the potential to save Americans who claim the credit up to $950 per year, according to the White House. But understanding these new changes can also be fairly daunting — new manufacturing guidelines, income thresholds and pricing caps abound. Making matters even murkier is that the Treasury Department is still ironing out how and when some of these requirements will come into play.

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 nonrefundable 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 to the credit that, for the most part, take effect in 2023 and last until 2032. Among them are new manufacturing requirements, income thresholds and expanded car type eligibility.

The new credit will allow 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. The Treasury Department is expected to issue further guidance on one of the new stipulations — the battery and critical mineral requirement — by March 2023.

» 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 an EV in 2022 that you plan to claim 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.

One thing to look out for

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

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. Still, it’s a good idea to check with the dealership and a tax pro to make sure.

Claiming the 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 critical mineral and battery requirement. The Treasury Department is expected to issue further guidance on the provision and will ultimately delay its enforcement until March 2023. ^[0]

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.

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. 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.

New Cars

Used Cars

If your income precludes you from qualifying, there are 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

Note: The Treasury Department is expected to issue further guidance on this requirement and will not enforce it until March.

The new credit, worth up to $7,500, is made up of two requirements, each adding up to half of the credit.

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.

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?

Given that the Treasury Department won’t issue final guidance on the battery sourcing requirements until March 2023, it’s hard to say with complete certainty. This news has led to speculation that certain cars that previously were deemed ineligible in 2023 because they did not meet the sourcing requirements may briefly qualify for a full tax credit from January to March 2023.

The safest bet? Check the following two lists released by the IRS of new and used clean vehicles that are likely to qualify based on the information submitted to the agency by the manufacturers. Per the IRS, the lists will be periodically updated with new additions. 

• New clean vehicles

• Used clean vehicles

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

Before you leave a dealership, 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.

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