Guidelines for Electric Vehicle Tax Credits
There are tax credits available when you purchase a new or used electric vehicle, for both fuel cell vehicles (FCV) and plug-in vehicles. These are obvious tax incentives to go green and buy an EV, but there are some rules for claiming the Federal Tax Credit.
What is a tax credit for an electric vehicle?
The nonrefundable tax credits, also known as an EV credit, are available to consumers who buy eligible electric or plug-in hybrid vehicles that meet eligibility requirements. Nonrefundable means that you won’t receive any money as a refund. The Federal credit will apply to your taxes, thereby reducing the amount of your tax liability. If there is credit left over after being applied to taxes, you can’t receive that in cash, and you cannot apply it to tax years in the future.
The Inflation Reduction Act recently changed the benefit by allowing up to $7,500 when a new EV is purchased, and capped it at 30% of the purchase price of a used vehicle, up to $4,000.
Guidelines for the tax credits
Your income must be below specific limits in order to qualify for the new Clean Vehicle Tax Credit, and the car you want to buy also needs to adhere to a number of IRS requirements, such as pricing ceilings and manufacturing standards.
Except for the critical minerals and battery requirements, which became applicable on April 18, 2023, all of the adjustments to the clean car tax credit took effect in January 2023.
Individuals or businesses purchasing electric vehicles from 2023 through 2032 can qualify if:
- The vehicle is for personal use and not intended to be resold
- It will be used mainly in the US
- Income requirements are met
New vehicle requirements effective April 18, 2023
The date you actually receive the car determines eligibility for the Federal Tax Credit, not when it was ordered or purchased. Eligible vehicles must be taken into possession on or after April 18, 2023, and the vehicle must also meet price limits along with the following requirements:
- The battery must have a minimum capacity of 7 kilowatt hours.
- The vehicle must have a vehicle weight rating of not more than 13,999 pounds
- EV’s must be produced by a qualified manufacturer. FCVs are not held to this rule.
- Assembly requirement that vehicle parts must be assembled in continental North America
- Critical minerals and battery component requirements must be adhered to
- Vehicle is new when purchased
- Information is supplied to the IRS and the buyer at the time of purchase. If your name and tax ID (SS or EIN) aren’t supplied to the IRS, you will not be eligible for the credit.
- The MRSP has to be under a price threshold, which isn’t necessarily what you pay. The price caps are:
- SUVs, vans, and pickup trucks cannot have a retail price of over $80,000
- Vehicles other than those above must have a retail price of $55,000 or under
Most of that information can be found on the window sticker of the vehicle.
Used qualifying vehicles
The prior version of the EV tax credit that was in place until April 18 excluded used cars, making it a topic of hot debate. Starting with the updated credit version starting April 18, 2023, used cars are eligible, but with a cap of 30% of the sale price, up to $4,000.
Requirements for used electric vehicles:
- They must be a fuel cell electric vehicle or a plug-in electric vehicle, with the battery having a minimum kilowatt hour capacity of 7 kw hours.
- The credit only applies to the first time a vehicle transfers to another owner
- Sale price must be $25,000 or under
- Model of the vehicle has to have been manufactured for at least 2 years
- Weight must be not more than 13,999 pounds
- Owner can only claim a credit one time every three years
How to tell if a particular EV is eligible
Research will be needed by potential buyers who want to know if a particular EV qualifies for a Federal credit. Automakers have created a list of vehicles they certify could potentially qualify, which can be found at fueleconomy.gov. Sometime in 2024 buyers will be able to claim the credit directly through qualified car dealerships, instead of having to wait until they file their taxes.
How to Claim the Credit
For now, electric vehicle owners will need to file form 8936 with their Federal income tax return, along with the vehicle identification number (VIN) of the vehicle. The Clean Vehicle Credit form, titled Qualified Plug-In Electric Drive Motor Vehicle Credit, can be found on the IRS.gov website.
Buyers who purchased their EV in 2022 should use IRS form 8936 when filing their income taxes in 2023. For EV’s that were bought in 2023, the form should be submitted with a tax return in 2024.
Jeffrey Ressler owns a boutique, full-service accounting firm in Boca Raton, Florida that provides individualized financial services, expert tax preparation, tax planning for individuals and companies, and finding solutions to IRS problems.