Electric Vehicle Tax Credit Explained

With high gas prices and new car offers every year, there’s never been a better time to explore electric vehicles. The newly updated EV tax credit provides an added incentive, making it more affordable than ever to make the switch. 

A federal electric vehicle tax credit is not a totally new innovation, but it has been modified by the 2022 Inflation Reduction Act to expand its effects moving forward. The new legislation aims to make the tax credit for electric vehicles available to more consumers.

Are you considering buying an electric vehicle? The new rules are a little complicated and will change over time. Read on and find out what the EV tax credit can do for you. 

How do the new electric car tax credits work? 

The EV federal tax credit in 2022 offers $7,500 toward the cost of a new electric vehicle. A tax credit will directly reduce the amount of money you owe when you file taxes. That means the credit essentially lowers the cost of the vehicle by paying $7,500 on what you owe on your personal tax return.   

Starting in January 2023, there will also be a $4,000 tax credit made available for purchasing certain used electric vehicles. 

Vehicle Requirements to Qualify for the Credit

In order to qualify for the electric vehicle tax credit in 2022, the vehicle must be assembled in North America. The U.S. Department of Energy has provided a list of electric vehicles that are likely to meet this requirement of the Clean Vehicle Credit. They also include a way to confirm a car’s qualifications by submitting the Vehicle Identification Number.  

The credit is also limited by a manufacturer sales cap until the end of 2022. Tax credits are no longer available once a manufacturer has sold 200,000 or more electric vehicles. That means that vehicles from more established EV brands like Tesla and Chevrolet will not qualify for the credit until 2023.

Does the EV tax credit apply to new cars?

These are the eligibility requirements for new cars starting in 2023: 

• Electric vehicle or plug-in hybrid electric vehicle 
• Final assembly in North America
• A significant portion of the critical minerals and battery components must come from the United States or an established trade partner
• Manufacturer’s suggested retail price of $80,000 or less for four-wheel trucks, vans, and SUVs
• MSRP of $55,000 or less for other vehicles

What are the Clean Vehicle Credit requirements for used cars?

These are the eligibility requirements for the used electric vehicles tax credit starting in 2023: 

• Final assembly in North America
• Battery components and minerals sourced from the U.S. and trading partners 
• Maximum sales price of $25,000
• Electric vehicle at least two years older than the year of purchase 
• Purchased through a dealer for personal use 
• EV credit can only be claimed once in a vehicle’s lifetime

Personal EV Tax Credit Eligibility Limits  

Am I eligible for the EV tax credit? In order to qualify, your income must be at or below certain established limits starting in 2023.

For a new vehicle, your modified adjusted gross income cannot exceed: 

• $150,000 for an individual
• $225,000 for a head of household
• $300,000 for married filing jointly returns

These are the limits for a used vehicle:

• $75,000 for an individual
• $112,500 for a head of household
• $150,000 for a married filing jointly return 

Is the EV Tax Credit refundable if I bought my vehicle before the IRA passed?

Did you buy an electric vehicle or make a written agreement to buy one before the IRA passed? If so, you can claim a tax credit under the previous rules; this means your car doesn’t have to meet the final assembly in the United States requirement. 

You will only have access to the $7,500 for new vehicles, assuming the manufacturer has not hit the 200,000 vehicle cap. 

But is the EV tax credit refundable? No matter when you claim the electric vehicle tax credit, it is a non-refundable tax credit. If you owe less than $7,500 on your taxes, you will not be given a check for the remaining amount. 

How to Claim the Electric Vehicle Tax Credit

So now you know how to find a vehicle that qualifies, but how does the EV tax credit work when it’s time to claim it? How do you make sure you get the credit you’re promised? 

According to the IRS and the Department of the Treasury, there will be a system in place by 2024 that allows car dealers to give you the credit up front. This should also reduce the vehicle’s price at the point of sale. Until then, you will have to report your purchase on your tax return to claim the credit. 

Here’s how to claim the EV tax credit in 2022 on your next tax return. 

1. Look up your vehicle and make sure it qualifies before you finalize the purchase.
2. Ask for a letter of certification from the car dealer proving that your car qualifies.
3. Keep all your receipts and paperwork.
4. Fill out and submit IRS Form 8936 with your personal 1040 return.  

Another option is to partner with a tax professional to ensure you're saving as much of that hard-earned money as possible.

Stay Up-to-Date on Tax Credits with an Online CPA

The IRA has been passed into law. However, some features of the electric vehicle tax credit won’t take effect until 2023 or later. The rules are complicated; it’s hard to keep track of what rules are still changing and when.  

Instead of trying to make sense of it all yourself, consider working with an accounting professional who can help you stay on top of changing legislation. They can answer any questions you may have about the EV tax credit and maximize your tax benefits. Count on the experts at 1-800Accountant to help you keep costs down and claim the credits and deductions you qualify for.