EV Tax Credit: How To Claim the Electric Vehicle Federal Tax Benefits

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The Inflation Reduction Act (IRA) of 2022 is a milestone legislation that boosted clean energy incentives, including tax credits for electric vehicles (EVs). The IRA introduced significant changes to the existing federal EV tax credit, the Clean Vehicle Credit. If you’re in the market for an EV, this guide will explain the most recent changes to the EV tax credit.

How does the EV federal tax credit work?

If you buy a battery-electric vehicle, a plug-in hybrid, or a hydrogen fuel-cell vehicle, you can claim up to $7,500 in credits from your federal taxes. The tax credits aim to lower EV buyers’ taxes in a given year and incentivize more people to purchase EVs. For example, if you owe $8,000 in federal taxes and buy an EV qualifying for a $7,500 tax credit, you will only owe $500 to the federal government after using the tax credit. It’s important to note that the IRA updated the EV federal tax credits, but the qualification criteria have also changed.

What are the IRA’s new EV tax credit requirements?

• $7,500 tax credit extension.
• The federal government established tax credits for hybrid vehicles in 2005. In 2010, it extended tax credits of up to $7,500 to new EV buyers. However, the 2010 rules would end the credits for any EV manufacturer after it sold 200,000 cars. The IRA changed the rules. It eliminates caps on EV manufacturer sales after Jan. 1, 2023, as part of the Clean Vehicle Credit. The IRA also extends the $7,500 tax credit for all-electric vehicles, some plug-in hybrid vehicles, and hydrogen-powered vehicles, which must meet specific qualifications from the federal government. Effective 2024, new EV buyers will receive the tax credit at the point of sale. The Clean Vehicle Credit will expire on Dec. 31, 2032.
• Fuel-cell cars are eligible for tax credits. You can claim $7,500 from your federal tax returns if you buy fuel-cell vehicles (FCVs) powered by hydrogen, like Hyundai Nexo or Toyota Mirai. Keep in mind that not all locations in the U.S. have hydrogen refueling stations — it’s crucial to find out if you have hydrogen refueling near you before investing in an FCV.
• Price caps on new EVs. The IRA established new eligibility criteria for EVs based on their prices. Low-emission pickup trucks, SUVs, and vans costing up to $80,000, and light passenger vehicles priced up to $55,000 qualify for the tax credits.
• Price caps on used EVs. Effective January 1, 2023, buyers of used EVs can deduct up to $4,000 from their federal taxes. All used EVs must be priced at or below $25,000 to qualify for the credit.
• Income limits for new EV buyers. Like new EV buyer income restrictions, the IRA established income caps for used EV buyers eligible for the tax credit. The modified adjusted gross income thresholds for buyers of used EVs are as follows:
  • $150,000 for single tax filers
  • $225,000 for head-of-household filers
  • $300,000 for married couples filing jointly
• Income limits for used EV buyers. Like new EV buyer income restrictions, the IRA established income caps for used EV buyers eligible for the tax credit. The modified adjusted gross income thresholds for buyers of used EVs are as follows:
  • $75,000 for single tax filers
  • $112,500 for head-of-household filers
  • $150,000 for married couples filing jointly
• Additional used EV tax credit eligibility requirements
  • The used vehicle must be at least two years old at the time of purchase.
  • The tax credit can only be used once in a vehicle’s lifespan.
  • After a used EV buyer has taken the tax credit, they wouldn’t qualify for a new one for three years.
  • An EV must be bought through a car dealer.
  • Only individuals, not businesses or dealers, qualify for the credit.
• New EV manufacturing requirements. While the IRA expanded and extended EV tax credits for 10 years, it also established new rules on EV manufacturers. EVs bought between Aug.17 and Dec. 31, 2022, qualify for the $7,500 tax credit if their final assembly occurs in North America. Effective Jan. 1, 2023:
  • EVs and batteries must be built and assembled in North America to qualify for the Clean Vehicle Credit.
  • A percentage of critical minerals (e.g., lithium, manganese, nickel, etc.) used for EV batteries must be sourced in North America.
  • EVs meeting critical mineral requirements qualify for a $3,750 tax credit.
  • EVs meeting battery component requirements will qualify for a $3,750 tax credit.
  • EVs failing to meet these requirements won’t be eligible for federal tax credits.
• Tax credit qualification requirements for EVs. Effective April 17, a qualifying vehicle must:
  • Have a battery capacity of at least 7 kilowatt-hours (kWh)
  • Have a gross vehicle weight of less than 14,000 pounds
  • Be manufactured by a qualified carmaker, FCVs are an exception
  • Go through final assembly in North America
  • Satisfy both the critical mineral and battery component requirements
• Immediate rebate at a point of sale. Effective Jan. 1, 2024, EV buyers can transfer their new clean vehicle credit of up to $7,500 and their previously owned clean vehicle credit of up to $4,000 to a car dealer. This allows buyers to lower the purchase price of their clean vehicle at a point of sale instead of waiting to claim the credit on their tax return the following year. A dealer is an individual licensed to sell cars in a state, Washington, D.C., or U.S. territory. This benefit applies only to vehicles purchased with consumer clean vehicle credits. To be eligible for credit claims or transfers starting Jan. 1, 2024:
  • Buyers must ensure that their dealer is registered with Energy Credits Online.
  • Dealers must use Energy Credits Online to submit “time of sale” reports, verifying the vehicle’s eligibility for credit, regardless of whether the buyer transfers the credit to the dealer.

Eligible credit amount

How much credit you qualify for depends on when you place a vehicle into service or when the vehicle is first sold. EVs in service up until the revised legislation will have different credit amounts than vehicles in service after April 18. 

Between Jan. 1 and April 17, 2023:

• $2,500 base sum
• $417 for a car with at least 7 kWh of battery capacity
• $417 for each kWh of battery capacity beyond 5 kWh
• Up to $7,500

According to the Internal Revenue Service (IRS), the minimum credit is $3,751 ($2,500 + 3x $417).

On or after April 18, 2023:

Eligible cars must meet the same criteria mentioned in the previous section. In addition, they must meet new critical mineral and battery component mandates to qualify for the credit:

• $3,750 is applicable only if the car fulfills the critical minerals requirement
• $3,750 is applicable only if the car fulfills the battery components requirement
• $7,500 if the car meets both

Cars that don’t meet either one of the conditions won’t qualify for a credit.

Which EVs qualify for federal tax credits?

Due to the IRA’s EV and battery manufacturing origination requirements, not all EVs qualify for the Clean Vehicle Credit, effective Jan. 1, 2023. The new rules narrow down many EVs eligible for the Clean Vehicle Credit. Some EVs will be eligible for half the credit due to meeting only the mineral requirements.

Here’s a list of EVs and plug-in electric vehicles (PHEVs) fully and partially eligible for the federal tax credit as of April 18, 2023.

What do I do next after determining my tax credit eligibility and the EV model I like?

You can buy some EVs directly on the manufacturer’s website or through a dealership. Once you purchase your EV, it’s important to plan how you will charge it. If you are one of many American EV owners wanting to charge your car at home, you must hire an electrician to install a 240-volt outlet for Level 2 charging. You can use Level 1 charging with a regular household 120-volt outlet, but Level 2 provides much faster charging. 

Public charging is convenient if you are on the road and must top up your car. Before you hit the road, find public chargingstations on your driving route or destination. Some public charging locations are free to use, while others charge a fee. The EV charging costs vary between providers and states. It’s worth researching which public charging locations you may need to pay a fee to charge your EV and where you can do it for free.