What is the EV (Electric Vehicle) tax credit?
The EV tax credit works similarly to other tax credits and can be applied when you file your tax return in the year after you purchased your vehicle. The minimum credit amount is $2,500, and the credit may be up to $7,500 based on each vehicle’s traction battery capacity and the gross vehicle weight rating. The credit applies to qualifying electric and plug-in vehicles, though the exact amount of the credit can vary depending on the make and model of the vehicle purchased. The credit is nonrefundable, meaning that it can only reduce your tax liability to zero – it will not result in an additional refund, even if the full amount of the credit is not used. While this tax credit has been available for many years now, the Inflation Reduction Act signed by President Biden on August 16th, 2022, has changed the credit in several ways.
Do I qualify for the EV tax credit?
In general, EV buyers can rely on the manufacturer’s certification to the IRS that the specific make, model, and year qualifies for the credit, and up to what amount. You can also reference https://www.fueleconomy.gov/feg/taxevb.shtml for any clarification. Additionally, there are income limitations – if you are a single filer and your modified adjusted gross income is over $150,000, you won’t qualify. The income limit for married filers is $300,000, and $225,000 is the limit for head of household. Per IRS guidance, the following requirements must also be met to qualify for the credit:
- You must be the owner of the vehicle – if the vehicle is leased, then only the lessor may claim the credit
- You must place the vehicle in service during the tax year
- The vehicle is manufactured for use on public streets and highways
- You are the original user of the vehicle, and did not acquire it for resale
- You use the vehicle primarily in the U.S.
How do I claim the EV tax credit?
Currently and going forward, consumers that purchase a qualifying electric vehicle can claim the EV credit when they file their annual tax return. However, the Inflation Reduction Act has also established a way for car buyers to instead reduce the purchase price of a new qualifying vehicles by transferring the credit at the point of sale. This initiative is set to begin in 2024.
How does the Inflation Reduction Act change the EV tax credit?
Effective immediately (after August 16th, 2022), the tax credit is only available for qualifying electric vehicles “for which final assembly occurred in North America.” This information is still being determined, but the Department of Energy’s Alternative Fuels Data Center has developed a list of 2022 and 2023 vehicles likely to meet the requirement here: https://afdc.energy.gov/laws/inflation-reduction-act. You can also identify the North American assembly requirement by entering the vehicles VIN into the National Highway Traffic Safety Administration’s VIN Decoder tool and refer to the “Plant Information” field found here: https://vpic.nhtsa.dot.gov/decoder/.
The Act also extends the EV tax credit for 10 years – until December 2032 – and will allow for a separate tax credit of either up to $4,000 or 30% of the price of previously owned clean vehicles (whichever is less), while removing the requirement that manufacturers producing more than 200,000 electric vehicles couldn’t qualify for the EV tax credit (meaning GM, Toyota, and Tesla EV owners among others now can claim the credit). Speaking of “clean vehicles” – the Inflation Reduction Act expands the EV tax credit to apply to any clean vehicle, meaning hydrogen fuel cell cars, plug-in hybrid vehicles (with certain battery capacities), and some commercial clean vehicles could also apply.
Vans, pickup trucks, and SUVs with MSRPs greater than $80,000 won’t qualify for the credit, and for clean cars to qualify the MRSP cannot exceed $55,000. Used clean vehicles will only qualify if they cost $25,000 or less and are at least two years old.
It is important to note that the only change to the existing EV credit taking effect before the end of 2022 is the new North American final assembly requirement – all other pre-Inflation Reduction Act rules are still in effect through the end of the year.
What if I purchased a qualifying electric vehicle prior to August 16th, but took possession of it after?
If you entered into a binding contract to purchase a qualifying EV prior to August 16th, the changes above regarding the North America final assembly requirement will not impact your tax credit, and instead you may claim the credit based on the rules that were previously in effect. Otherwise, the final assembly requirement will apply.
The Internal Revenue Service and the Department of the Treasury have stated that they will continue to provide updates regarding the EV tax credit in the coming months. We will also be following this issue closely and will keep up to date on any changes that may impact our clients for the 2022 and future tax years.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied upon for tax, legal, or accounting advice. If you have any questions about the electric vehicle tax credit, please do not hesitate to contact us at Lear & Pannepacker.