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How Do Electric Vehicle Tax Credits Work?

2024 lexus rx450h
Your Guide to EV Tax CreditsLexus

The federal government has been subsidizing the production and sale of electric vehicles for more than a decade. Through a $7500 credit administered by the Internal Revenue Service, hundreds of thousands of EV buyers have reduced their tax bills. But now it's not as simple. If you're wondering what the deal is on a new 2024 vehicle—and now, used EVs and plug-in hybrids—here's what you need to know. But first, a brief history.

In the 2010s, the Credit Started Slow

In 2010, the IRS phased out tax credits worth up to $3400 for hybrids, diesels, and natural gas vehicles and established an EV tax credit worth up to $7500 for the handful of plug-in hybrids and battery-electric vehicles on sale. In the decade since, several automakers hit production caps that left their customers ineligible to claim the credits, all while a significant portion of those buyers—high-income earners who could easily drop 100 grand on a Tesla Model S—were being unnecessarily subsidized by taxpayers.

Then came the COVID-19 pandemic in 2020, which completely disrupted automotive supply chains and exposed a serious weakness in U.S. manufacturing, namely its reliance on critical parts from China and Russia. Legislators threw down billions to make up for the economic harm resulting from state shutdowns and COVID-19 restrictions. To combat the resulting high inflation, legislators passed yet another bill in 2022—the Inflation Reduction Act (IRA)—which dramatically changed the way the federal government incentivizes EVs.

How Do I Claim EV Tax Credits?

There are now two types of EV tax credits and three ways to claim them. The EV tax credit for new vehicles is either $3750 or $7500, but very few new vehicles now qualify. For those that do, the buyer (individuals or businesses) can claim the credit by either:

  1. Filing a federal income tax return and Form 8936 for the year in which the vehicle was delivered and put into service.

  2. Receiving the credit immediately at the point of sale, in which you authorize the credit's transfer to the dealership, which then reduces the purchase price by the credit's amount.

The third method is a loophole in the IRA law. Many unqualified new vehicles can receive the full $7500 if they're leased. You cannot personally claim an EV tax credit on a leased vehicle, because the automaker's bank is the owner. But your lease payments may be reduced if the bank passes on some or all of its tax credit savings in your contract. Many automakers are doing just that.

For used vehicles, the credit is worth 30 percent of the purchase price with a maximum credit of $4000. The claim process works the same way, only there is no credit for used leases and the credit applies only to individuals.

How Do EV Tax Credits Work?

The credits reduce a filer's federal income tax for the year, subject to price and income caps. EV tax credits are nonrefundable. This means they can only be applied to tax owed in the year in which you took delivery. Businesses, however, can transfer new EV tax credits to future years. There are many limitations that can reduce or forfeit the filer's tax credit.

If You Claim the Credit on Your Return:

You will not realize any credit until you file a tax return for the preceding year. For example, if you took delivery of an EV eligible for a $7500 tax credit in 2024 and your federal tax for that year was $8500, your total tax would be $1000. You would then pay the balance of whatever you owe or elect to be refunded the credit's amount (or apply the refund to the next tax year). Consequently, if you owe a lesser amount of taxes than the credit, then your credit is reduced to that lesser amount. In the same example, if you owed $6500 in tax, you would only receive a $6500 credit.

If you exceed the income caps (described below), you must pay back all of the credit as part of your income tax.

If You Transfer the Credit to a Dealer:

You receive the full credit at the time of sale in either cash or a reduced down payment. The dealer must be registered with the IRS, which checks in real time if a car is eligible and for how much. The dealer receives the credit payment within two to three days after the sale. You still have to file the credit paperwork with your tax return, and if you do not meet the requirements—say, you get a big raise halfway through the year—you may have to repay the credit as income tax.

Buyer beware: This is an easy scam. Get a copy of the bill of sale the dealer sends to the IRS and the confirmation the IRS sends to the dealer. Be certain the cash or discount on the final purchase price is correct. Current IRS guidance does not appear to penalize a dealer from keeping some or all of the credit.

Which Vehicles Qualify for EV Tax Credits?

All qualifying EVs, which includes plug-in hybrids (PHEVs), must be built in North America. Hydrogen fuel-cell vehicles can come from anywhere. There are also rules around vehicle prices, purchaser income, and battery production. Any foreign-made EV is ineligible (check the VIN of the specific vehicle you're looking at to confirm it was assembled in North America). EVs made in North America may be eligible for either $3750 or $7500. There is no amount in between.

New EVs and PHEVs Purchased or Financed in 2024

1. General Requirements

  • Built in the U.S, Canada, or Mexico

  • Battery capacity must be at least 7.0 kWh and capable of being recharged from external power source

  • Gross Vehicle Weight Rating (GVWR) must be less than 14,000 pounds

  • Made by a qualified manufacturer registered and approved by the IRS

2. Income Limits

Income is defined as adjusted gross income (AGI), which is the amount listed on line 11 of Form 1040. If you earned income outside the U.S., you must add that income to your AGI.

  • Single and Married Filing Separately: $150,000

  • Head of Household: $225,000

  • Married Filing Jointly and Surviving Spouses: $300,000

3. Price Caps

  • $55,000 MSRP for cars

  • $80,000 MSRP for SUVs, crossovers, and light trucks

  • MSRP is defined as the manufacturer price for the chosen trim level at the time of sale, excluding destination fees and dealer-installed accessories or add-ons. Incentives and trade-in credits do not affect the MSRP.

4. Battery Production

  • At least 50 percent of the value of a battery's "critical minerals" must be "extracted or processed in the United States or a country with which the United States has a free trade agreement, or be recycled in North America," according to the U.S. Treasury.

  • Critical minerals are defined by the Secretary of the Interior and include nearly every mineral used in a battery today (lithium, cobalt, manganese, nickel).

  • Only vehicles with batteries that meet the 50 percent mineral requirement receive an initial $3750 tax credit.

  • At least 60 percent of the value of a battery's components "must be manufactured or assembled in North America," according to the U.S. Treasury.

  • No eligible battery can contain any components made in China, Russia, Iran, or North Korea. The components don't include minerals, which by 2025 will also have the same country restrictions.

  • Only vehicles with batteries that meet the 60 percent component requirement receive a secondary $3750 tax credit.

  • Only vehicles with batteries that satisfy both requirements are eligible for the $7500.

New EVs and PHEVs Leased in 2024

The U.S. Treasury Department issued guidance to exempt any leased EV or PHEV from battery production and final assembly requirements. The same price caps apply, but since a lease is considered a "commercial" transaction, there are no income limits and no need to file anything. At the moment, this may make leasing more attractive than purchasing since every model is eligible no matter where it is made. Just be certain the lease deal is passing on the savings in your contract.

Used EVs and PHEVs Purchased or Financed in 2024

The credit is 30 percent of the sale price up to a maximum of $4000. That means the minimum sale price needed to claim the full credit is $13,333.33. All previous general requirements apply except for final assembly, plus the new requirements listed below.

1. General Requirements

  • Must be purchased from a licensed dealer; no private sales

  • Must be at least two model years old

  • Cannot be the original owner

  • Can claim only one used vehicle credit every three years

2. Income Limits

Income is defined as adjusted gross income (AGI), which is the amount listed on line 11 of Form 1040. If you earned income outside the U.S., you must add that income to your AGI.

  • Single and Married Filing Separately: $75,000

  • Head of Household: $112,500

  • Married Filing Jointly and Surviving Spouses: $150,000

3. Price Caps

  • $25,000

Which New EVs and PHEVs Can I Purchase or Finance That Qualify for Tax Credits?

Check the EPA's frequently updated list of 2022 through 2024 new vehicles that are eligible if they meet price caps, and see if your vehicle is included and if so, how much of a tax credit you are entitled to.

Which Used EVs and PHEVs Can I Purchase or Finance That Qualify for Tax Credits?

This list is far more exhaustive. Several cars, such as the Fisker Karma, are curiously not listed as qualifying. You can view the list here.

When Do EV Tax Credits Expire?

The tax credits currently end on December 31, 2032.

State EV Tax Credits

A handful of states offer their own EV tax credits, however, most incentivize the purchase of EVs, PHEVs, and—in the case of California—hydrogen fuel-cell vehicles with various other perks. Furthermore, individual counties and cities throughout the country offer additional incentives. The Department of Energy (DOE) maintains a database of the incentives each state offers for buyers of various alternative fuel vehicles.

Is EV Charging Tax Deductible?

The federal government no longer provides a tax credit related to the charging of an EV or PHEV. It previously offered a tax credit of up to $1000 for the installation of a home charger, but that incentive expired well before the IRA was passed. That said, the IRA does offer tax credits for the installation of commercial chargers.

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