If you’re wondering how to get EV credits at tax time, you have come to the right place! We cover the past, present, and future of this complicated topic.
For the first time in recorded history, Americans are actually visiting the IRS website. Why? To find out how to get EV credits at tax time. Ok, that first sentence is not based on any facts, but given all the hoopla around this hot topic, it could be. So, kudos to the IRS for providing an easy-to-navigate and understand site – at least as it relates to the Inflation Reduction Act EV tax credit.
Though the Inflation Reduction Act, which was signed into law by President Biden last August, sounds like it’s all about inflation, a large chunk of it is related to climate change as we discuss here. It goes hand-in-hand with the push to create a national EV charging network. To that end, the IRA puts in place a host of new requirements around the long-running $7,500 tax credit for buyers of electric vehicles. This has caused confusion and consternation amongst said consumers about whether they qualify.
For tax credits on EV purchases, the IRS currently has four categories organized chronologically based on when the vehicle was purchased, which we’ll follow below to keep things clear:
For new EVs purchased on or before August 16, 2022, the value of the tax credit is a base amount of $2,917 plus $417 for every additional kilowatt-hour (kWh) of battery capacity over 5 kWh. So, to obtain the full $7,500 tax credit, the vehicle would need to have at least a 16-kWh battery capacity. Other requirements for this category are a gross vehicle weight rating (GVWR) under 14,000 pounds and that the particular automaker has not sold more than 200,000 EVs in the US.
To make things easier, the IRS has this index that lists all the manufacturers and associated models that qualify under these rules. It also calculates the credit amount for each model. As the older rules are less onerous, there are a lot more automakers on here – Canoo, Wheego, etc. – than you’ll find going forward. Also, for companies like Toyota and Tesla that have hit or are approaching the 200,000-unit threshold, the index details how the tax credit phases out.
Along with meeting the rules above, any new EVs purchased between August 17 and December 31, 2022 must have been assembled in Canada, the United States, or Mexico to receive the tax credit. This Department of Energy site verifies the final assembly location based on your vehicle’s VIN. Plug it in and out comes a very clear Yes or No on meeting this requirement.
If you signed the vehicle purchase agreement before August 16, 2022, but took delivery on or after that date, you can claim your credit using the older set of rules with no final assembly requirement. However, if you entered the purchase agreement in the August 17 to December 31, 2022 window, but took delivery in 2023 – you must follow the new 2023 rules to claim your EV tax credit.
Buckle up because this is when the answer to “what qualifies for an EV tax credit” question gets more complicated. First off, the vehicle must have a battery capacity of at least 7 kWh. The actual credit amount is calculated as a base of $2,500 plus $417 for every kWh of capacity beyond 5 kWh – up to an extra $5,000 for a maximum credit of $7,500.
Additionally, the vehicle cannot exceed a sale price of $80,000 for vans, SUVs, and pickups with a $55,00 cap on other vehicle types. This IRS index provides a list of manufacturers and models that currently qualify for the new requirements. These vehicles still need to meet the North American assembly qualifier and 14,000-pound GVWR limit plus buyers now have an income threshold for tax credit eligibility.
For married couples filing taxes jointly, the cap on modified adjusted gross income is $300,000. For heads of household, that figure is $225,000; for anyone else, it’s $150,000. Exceed those amounts and you don’t qualify for the EV tax credit.
Per the IRS, you can use the modified adjusted gross income from the year you take delivery of your new EV or the year prior – whichever is less.
A bonus for these new rules is that fuel cell vehicles (FCV) are now eligible for what has been renamed a “clean vehicle tax credit” and said FCVs do not have a stated manufacturer requirement. Another bonus is the prior rule about phasing out vehicles from automakers that have produced more than 200,000 units has been eliminated.
This should make Tesla happy given the level of investment they’re geared up for. Third and final (future) bonus – starting in 2024, the tax credit can be taken at the dealership during purchase instead of having to wait until tax time.
Starting on April 18, 2023 – which just so happens to be Tax Day – there will be even more stringent requirements for claiming an EV tax credit that builds on the aforementioned rules as of January 1, 2023. The $7,500 figure will be split in half where $3,750 can be claimed if the vehicle meets a critical minerals requirement and $3,750 is available if it meets battery component requirements.
The critical mineral requirement states that as of April 18, 2023, 40% of these battery minerals must come from (extracted, processed, or recycled) the US or a country that shares a free trade agreement with the US. That percentage goes up by 10 points each year until 2027 when it maxes out at 80%.
To qualify for the other half of the tax credit, as of April 18, 2023, 50% of battery components must be manufactured or assembled in North America. That figure increases by 10 points every year until 2029 when it becomes 100%. Beginning in 2024, a qualifying vehicle cannot have any battery bits made by a “foreign entity of concern” and in 2025, that language applies to the critical mineral content sourcing.
Naturally, the onus for determining these percentages will fall to the automakers, not the consumer – so just keep an eye on the regularly updated indices mentioned above to learn what vehicles qualify. If a vehicle only meets one-half of these new requirements – minerals but not battery components for example – the buyer can still claim a $3,750 tax credit. Also of note, if a new clean vehicle is purchased before April 18, 2023, but delivered afterward – these latest rules apply.
Another bit of clean vehicle tax credit information worth knowing is that used EVs or FCVs purchased in 2023 may be eligible for a rebate of 30% of the sale price up to a maximum of $4,000. To qualify, the vehicle must be purchased from a dealer and have a sale price of $25,000 or less. As well, the model year has to be at least two years earlier than the year it was purchased and the battery capacity must be at least 7 kWh. The applicable modified AGI caps are $150,000 for joint filers, $112,500 for heads of household, and $75,000 for everyone else. This IRS index provides a current list of used clean vehicles that are eligible.
The good news is that no matter which of the above categories you fall into, claiming your EV tax credit is the same process. Fill out IRS Form 8936 – which is mercifully short – and file it with your taxes.