Electric vehicles (EVs) are gaining popularity, with their market share in the U.S. rising to 7.6% in 2023, up from 5.9% in 2022, according to estimates from Kelley Blue Book. To encourage more people to buy EVs, a federal tax credit (incentive) of up to $7,500 is available for qualifying vehicles. This credit was updated under the Inflation Reduction Act of 2022, which aims to promote the purchase of EVs and lower the country's carbon emissions.
Here's a breakdown of how the credit works:
Eligibility for the Credit
Vehicle Requirements:
Qualifying Vehicles: Only certain new electric vehicles (EVs) or plug-in hybrid electric vehicles (PHEVs) qualify for the credit. The vehicle must meet certain battery capacity (at least seven kilowatt hours) and sourcing requirements.
Final Assembly in North America: Beginning on April 18, 2023, the vehicle must have its final assembly in North America to qualify for the credit.
Weight Restrictions: The gross vehicle weight rating should be less than 14,000 pounds
Critical Mineral and Battery Component Requirements: A portion of the $7,500 is tied to where the minerals and components of the EV battery are sourced. Specifically:
$3,750 of the credit is tied to the sourcing of critical minerals (such as lithium) from the U.S. or trade partners.
$3,750 is tied to the assembly of the battery components in the U.S. or a trade partner country.
Price Limits:
For SUVs, trucks, and vans, the manufacturer’s suggested retail price (MSRP) must be $80,000 or less.
For other vehicles (e.g., sedans), the MSRP must be $55,000 or less.
Income Limits:
$300,000 for married couples filing jointly.
$225,000 for head of household.
$150,000 for single filers.
How the Credit Works
The credit reduces your tax liability. So, if you owe $7,500 or more in taxes, you can take full advantage of the credit. If your tax liability is less than $7,500, the credit will reduce what you owe, but you won’t receive the difference as a refund. Starting in 2024, consumers will be able to apply the credit at the point of sale to reduce the vehicle's purchase price directly. If you don’t transfer the credit, it’s “nonrefundable” so you can’t get back more on the credit than you owe in taxes. And you can’t apply any excess credit to future tax years.
Used EV Tax Credit
There’s also a tax credit for used EVs, which is $4,000 or 30% of the sale price (whichever is lower). To be eligible for this credit on your used EV, the vehicle must be purchased from a licensed dealer for $25,000 or less. Also, your MAGI can’t exceed $150,000 for married couples filing jointly, $112,500 for taxpayers filing as heads of households or $75,000 for other filers.
If you're considering purchasing an EV or have already purchased one, this tax credit can be a significant incentive. However, it's important to ensure that both you and the vehicle meet all the eligibility requirements to avoid any surprises. Many taxpayers and vehicles may not qualify. Feel free to reach out to us for assistance in navigating the process.