EV Tax Credit 2023: Rules and Qualifications for Electric Vehicle Purchases

People who buy new electric vehicles may be eligible for a tax credit as high as $7,500, and used electric car owners may qualify for up to $4,000 in tax breaks as of 2023.

The EV tax credit was extended and revamped under the Inflation Reduction Act of 2022, which means that people buying vehicles though 2032 may be eligible for these benefits. However, there may be some hiccups for consumers as the changes roll out this year.

As of April 2023, electric vehicles have to meet new manufacturing standards requiring batteries and critical minerals to be at least partially sourced from the U.S. And there are other changes to account for, including income thresholds and price caps.

While these latest rules may complicate your choices under the EV tax credit, the overall program is expected to result in more people using the benefit over time. The White House has estimated that credit could save taxpayers up to $950 per year.^[0]

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.

» Bought an electric vehicle in 2022? Here are the earlier rules for the program.

The electric vehicle tax credit, or the EV credit, is a nonrefundable tax credit offered to taxpayers who purchase qualifying electric vehicles or plug-in hybrid vehicles. Nonrefundable tax credits lower your tax liability by the corresponding credit amount. This means the credit can make a sizable dent in your tax bill, but you won’t see any overage back in the form of a tax refund.

The tax benefit, which was recently modified by the Inflation Reduction Act for years 2023 through 2032, 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. Taxpayers can only claim one credit per vehicle.

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

To qualify for the new EV tax credit, your income must fall beneath certain thresholds, and the vehicle you intend to purchase must also meet several IRS specifications, including price caps and manufacturing guidelines.

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 rules, which began to apply on April 18, 2023.^[0]

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 with at least 7 kilowatt hours of battery capacity.

• 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 two years old.

• Vehicle must weigh less than 14,000 pounds.

• 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

As of 2023, vans, SUVs and pickup trucks must have an MSRP, or manufacturer's suggested retail price, of $80,000 or under to qualify for the credit. 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 limit

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 before 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.^[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 big news for people who may want to invest in an EV but have been dissuaded by high sticker prices. You 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]

The new tax credit, worth up to $7,500, is made up of battery and sourcing requirements, each adding up to half of the credit. If the car meets both requirements, it is eligible for the full credit. If it meets only one requirement, it may be eligible for a partial credit of $3,750.

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]

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]

As of Aug. 28, 2023, the following fully electric and plug-in hybrid vehicles are eligible for either a full or partial tax credit if delivered on or after April 18, 2023, per FuelEconomy.org.

The IRS urges taxpayers to use the tool on 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.

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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To claim the credit, taxpayers can file Form 8936 when they file their federal income taxes. The credit is nonrefundable, which means it can lower or eliminate taxes owed but will not result in a refund. You also won't be able to carry over any excess amount to offset future taxes^[0]

Some fine print: 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 was purchased.^[0]

In 2024, taxpayers may also be able to transfer the credit to the dealership for a direct discount on the car rather than waiting until the next calendar year to claim the credit on their returns. The IRS is expected to issue further guidance on this credit flexibility in the coming months^[0]

If you purchased and received delivery of an EV in 2022, and you're wondering how to claim the credit on your 2022 return, most of the old credit rules still apply. Here’s a recap of how the tax 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.

Note that per the IRS, if you purchased, or entered into a written binding contract to purchase, a qualifying vehicle after Dec. 31, 2021, and before Aug. 16, 2022, and you expect the car to be delivered in 2023, you'll need to claim the credit on your 2022 return — but not until the car is actually delivered. This means if you've already filed your 2022 return without an extension, you may need to submit an amended return to claim the credit once the car is delivered to you.^[0]

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

Though individual consumers can’t claim the clean vehicle tax credit when leasing an EV, they might still see some trickle-down savings passed down from the dealer.

Leased cars are considered commercial vehicles that are owned by the businesses — such as dealerships and leasing agencies — that purchase them^[0]

The commercial credit is far less restrictive than the clean vehicle credit currently available to individual taxpayers. It allows businesses to claim tax breaks for a wider range of eligible electric vehicles, including ones that were not manufactured in the U.S.^[0]

Even though the dealership gets the tax credit for purchasing the car, the potential benefit to individual consumers here is that the dealer can, in theory, then pass down the savings by lowering the leasing cost by the credit amount.

A word of caution for potential lessees, though: Just because the dealership could pass those savings onto you, doesn’t mean it will. Dealers aren’t required to give customers a discount on their leases, so it may require some negotiating on your end.

Assessing the transparency of any deal that claims the savings are being passed down may also require a good bit of research and shopping around to ensure you’re getting the best deal. Plus there are other factors about leasing that you may want to take into account.

» MORE: Leasing vs. Buying an Electric Car: How to Compare

The clean vehicle credit expansion is exciting news for taxpayers looking to go green, but it still remains fairly complicated and nuanced — especially given the murk surrounding the new sourcing requirements. If you’re confused about your eligibility or want guidance for your personal situation, consider consulting a qualified tax professional, such as a CPA or a tax preparer before you sign on the dotted line.