How does the EV tax credit work?

Introduced in 2022, the Inflation Reduction Act set out to make it easier to purchase and own an electric vehicle in the United States by providing EV tax credits. The introduction of EV tax credits has made buying an electric car a possibility for more drivers than ever before. If you’re unsure what EV tax credits mean for you, and how you can claim them, we’ve put together a handy guide below.  

How does EV tax credit work in 2023?

EV tax credits were first introduced on August 16th, 2022, as a way of benefitting climate action. Put simply, the tax credits meant that those who bought qualifying electric vehicles would be able to claim up to $950 worth of credit a year.

However, recent changes were made in 2023 and are set to last until 2032. If you bought your car in 2022 (but are filing taxes in 2023) the total credit range that an owner can claim is between $2,500 and $7,500. Factors such as the vehicle’s weight, whether you own the car you’re claiming on, and the number of cars sold by the manufacturer, all contribute to your claims.

To do this, you just add another form to your tax return, including some key details about your car to prove it qualifies.

If you’re thinking of claiming tax credits when you file your taxes next year, you’ll need to be able to provide information about your purchase. These can include the things such as:

• Your income
• The manufacturer of your car
• The make of your car

If you’re purchasing a new electric vehicle, you claim at most $7,500. If you’re purchasing a used EV, then you’re allowed to claim back up to $4,000 or 30% of the sale price, whichever is lower.  

How to claim EV tax credit?

You’ve picked out the car that’s right for you, you’ve checked it’s qualified for EV tax credits and now it’s sat on your driveway. But how do you actually claim your credits back?

Fortunately, the process is relatively simple. Claiming the credit back requires you to file Form 8936 with your next tax return. You can find a link to the form, and additional details on the IRS page for EV tax credits.   

The form requires details about your newly purchased vehicle, including the vehicle identification number.

What important EV tax credit details do I need to remember?

In 2022, if you bought an EV from a manufacturer who had previously made more than 200,000 qualifying vehicles, you wouldn’t be able to claim against it. Luckily, in 2023, that cap has been lifted and you can claim tax credits regardless of how many vehicles have been made.

Another positive addition to the 2023 reform is that used electric cars now qualify for EV tax credits. However, they do come with some stipulations.

To qualify, a used electric vehicle must:

• Be plug-in electric or fuel cell.
• Be at least two years old.
• Have cost $25,000 or less

Tax credits only cover the first transfer of the EV. i.e. You won’t qualify if you’re the third owner of the car. You also can’t claim credit more than once every three years.

New vehicles must also fall under a certain price to claim a tax rebate. SUVs, trucks, and vans must cost $80,000 or less. Sedans and other cars must cost $55,000 or less. This price is based on the manufacturer’s suggested retail price, or MSRP, and includes the addition of accessories. Fortunately, taxes and other fees added on by the dealer don’t count towards the total cost of the vehicle.

The new credit rules have also introduced new stipulations for gross income. These determine how much you can earn before you’re no longer eligible for an EV tax credit. For example, if your tax-filing status is single, then the modified, adjusted gross income is max $150,000. If your tax-filing status is married, and filing jointly, then it’s $300,000. Be sure to check the finer details before applying for tax credit.

Your vehicle should have also had final assembly in North America if you want to apply for EV tax credits. Likewise, starting from 2023, strict percentages of your vehicle's battery and critical minerals must be assembled, manufactured, or processed in the U.S. or a country that the U.S. has a free-trade agreement with. So for example, in 2023, 50% of your battery must be sourced in North America, whereas in 2024, it must be 60% with the required percentile reaching 100% by 2029.

Is the EV tax credit refundable?

EV tax credits are non-refundable. This means that the discount can lower your tax bill but it doesn’t mean you’ll receive a refund. In other words, if your tax bill was $3,000 and your EV tax credit is $4,000, you could reduce your tax bill to zero, but you wouldn’t be able to use or access the remaining $1,000 worth of credits.

Can you get electric cars on lease?

Yes, buying electric cars on lease is a hugely popular option for many. Typical car leases are also subject tax credits, though in these cases the car dealer would receive commercial credit. Usually, the dealer would pass on these savings to the customer, resulting in a discounted purchase.

With a successful EV tax credit application in hand, becoming the proud owner of your very own electric vehicle may be close than you think.