EV Credits – What You Need to Know

The American Recovery and Reinvestment Act of February 2009 replaced the federal tax credit for EVs with a smaller tax credit with an eye toward curbing inflation. Many of the new rules laid out in the many changes introduced by the Inflation Reduction Act of August 2022 had already taken effect, while others were scheduled to take effect on January 1, 2023.

• Effective immediately, qualifying vehicles must be assembled in North America.
• Starting in 2023, increasing percentages of battery minerals and components must be sourced from the U.S. or one of its free-trade partners.
• There are significant new eligibility limits on both the price of the vehicle and the buyer’s income; if either figure is too high, there is no credit for you.
• Used EVs sold by dealers would be eligible for a one-time tax credit if they didn’t get one when new.
• The manufacturer vehicle sales cap will go away, meaning brands that reached the previous 200,000-unit limit can once again offer these incentives starting in 2023.
• Starting in 2024, a new mechanism will allow buyers to take the EV tax credit directly from the dealer at the point of sale rather than having to wait for the next tax season.

Why all the changes? Currently, the federal government intends to boost the production and sales of affordable mass-market EVs and strengthen our regional electric vehicle supply chain. However, the new law will eliminate the many EVs and PHVs that qualified for an electric car tax credit. Let’s take a closer look at all the new provisions.

How do the new EV tax credits work?

Click on any of the links below to jump to the information you’re looking for, or keep scrolling to get all the details.  

1. What are the requirements regarding North American supply and production?
2. What are the eligibility limits on new vehicle prices and buyer income?
3. What about used EVs?
4. Which new vehicles qualify for federal EV tax credits today?
5. What happens to the tax credits that existed before the Inflation Reduction Act?
6. What if I purchased a credit-eligible EV before the passage of the Inflation Reduction Act?
7. Frequently Asked Questions

1. What are the requirements regarding North American supply and production?

• The final assembly of the new vehicle must occur in North America (Canada, Mexico, U.S.). This went into effect on August 16, 2022, and will affect vehicles purchased through 2032.
• The maximum credit available for new vehicles is still $7,500, but the battery size no longer dictates how much of the credit you get. Starting in 2023, the full $7,500 credit will be split into halves with separate criteria:
  1. Critical battery minerals: To qualify for this $3,750 credit in 2023, at least 40% of the critical minerals in the battery must have been either recycled in the U.S. or extracted or processed there (or in any country that has a free trade agreement with the U.S.). After that, the required percentage increases to 50% in 2024, 60% in 2025, 70% in 2026 and 80% in 2027.
  2. Battery components: To qualify for the remaining $3,750 credit in 2023, at least 50% of the EV’s battery components must be manufactured or assembled in the U.S. (or in any country that has a free-trade agreement with the U.S.). After that, the percentage increases to 60% in 2024-2025, 70% in 2026, 80% in 2027, 90% in 2028 and 100% in 2029.

Blacklisted countries ultimately cannot be involved with battery components or minerals. From January 1, 2024, a vehicle will be ineligible if any of the battery’s components were sourced from a “foreign entity of concern,” which includes China and Russia as of this writing, as well as Iran and North Korea. As of January 1, 2025, this exclusion will extend to cover critical battery minerals too. That’s a big deal given China’s outsized role in the minerals supply chain to date.

2. What are the eligibility limits on vehicle price and buyer income?

The following rules are effective as of January 1, 2023:

Price limits for new vehicles

1. 1. SUVs, vans and pickup trucks: no more than $80,000
   2. Any other qualifying vehicle: no more than $55,000

Income limits for new vehicles

These limits are based on modified adjusted gross income (MAGI), which is roughly the adjusted gross income with certain allowable deductions added back in, for the current or prior tax year. Depending on filing status, the limits are:

1. Joint tax returns or a surviving spouse: MAGI must not exceed $300,000.
2. Head of household: MAGI must not exceed $225,000.
3. Individual or any other filing status: MAGI must not exceed $150,000.
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3. What about used EVs?

The tax credit for used EVs will be calculated at either 30% of the vehicle’s value or $4,000, whichever is less. The rules for used EVs also take effect on January 1, 2023, and are as follows:

Price limit for used vehicles
There is a hard eligibility ceiling at $25,000 for all used EVs regardless of type.

Income limits for used vehicles
By filing status, the limits are:

1. 1. Joint tax returns or a surviving spouse: MAGI must not exceed $150,000.
   2. Head of household: MAGI must not exceed $112,500.
   3. Individual or any other filing status: MAGI must not exceed $75,000.

Other eligibility requirements for used EVs

1. 1. 1. The vehicle must be at least two model years older than the calendar year in which it is purchased.
      2. The used EV tax credit will only apply once in the vehicle’s lifetime. Subsequent owners will not be eligible.
      3. Similarly, if the vehicle was given a tax credit when it was new, it is not eligible for another one as a used vehicle.
      4. The vehicle must be for personal use and “not for resale.”
      5. The vehicle must be purchased at a dealership.
      6. Only an individual may claim the used EV tax credit. Businesses are excluded.

4. Which new vehicles qualify for federal EV tax credits today?

The following vehicles should qualify for the updated EV tax credits for the remainder of 2022 because they are or will be assembled in North America. After the guidelines have been set for 2023, we’ll have a better idea of the exact amount of tax credits each vehicle will qualify for, and the list of eligible vehicles may change. The current list comes from the U.S. Department of Energy and is based on data submitted to the National Highway Traffic Safety Administration (NHTSA) and FuelEconomy.gov as of August 1, 2022.

Whether or not the vehicle you’re interested in is on the list, it’s a good idea to double-check its build location to be sure. You can run the vehicle identification number (VIN) through a VIN decoder and look for the country name in the “Plant Information” field at the bottom of the page, or else simply check the window sticker if you have access.

We will strive to keep the list up to date as vehicle manufacturers continue to submit the applicable vehicle identification information to the relevant government agencies and more information becomes available.

NOTE: Some manufacturers that assemble otherwise eligible vehicles in North America have reached the cap of 200,000 EV credits used and are therefore not currently eligible for the Clean Vehicle Credit in 2022. As noted, the EV sales cap will be lifted once 2023 rolls around. Also, some of the vehicles on this list will be ineligible in 2023 because their MSRPs exceed the limits discussed above.

Source: U.S. Department of Energy

5. What happens to the tax credits that existed before the Inflation Reduction Act?

The Internal Revenue Service has provided some preliminary guidelines regarding the EV tax credit and its immediate future.

The previous $7,500 tax credit, which did not have limitations on income, price or battery component sourcing, will still be in effect until December 31, 2022. However, now that the Inflation Reduction Act has been signed into law, the North American “final assembly” requirement will immediately apply. This will greatly reduce the pool of vehicles to choose from until automakers start to locate more of their supply chains and factories within North America, which could take a few years.

6. What if I purchased a credit-eligible EV before the passage of the Inflation Reduction Act?

If you purchased an eligible EV or PHEV before August 16, 2022, the tax credit should still be valid on your 2023 income taxes even if that vehicle is no longer on the approved vehicle list. Even if you have a written binding sales contract before August 16 but take delivery of the vehicle in 2023, the older rules of the tax credit should still apply.

This federal incentive has often been referred to as a flat $7,500 credit, but it’s only worth $7,500 to someone whose tax bill at the end of the year is $7,500 or more. Let’s say you owe $4,000 in income tax — that’s all the tax credit will be. Uncle Sam’s not writing a refund check for the other $3,500. And an unused portion of the credit can’t be applied against the following year’s taxes. This is because the electric vehicle tax credit is nonrefundable. It can bring your federal tax bill to zero, but it will not stack on to a potential tax refund.

If you are leasing the EV, the tax credit goes to the manufacturer that’s offering the lease, not you. The carmaker will likely factor the credit into the cost of the lease to lower your monthly payment, but this isn’t mandatory.

The previous credits were also based on the electric vehicle’s battery size. Most electric vehicles qualified for the full $7,500, but for some plug-in hybrid models, the credit amount could fall well below the maximum credit. For example, the Toyota Prius Prime plug-in hybrid only qualified for a $4,502 tax credit.

Vehicles that qualified for the older federal EV tax credit

The U.S. Department of Energy maintains the entire list. You can sort by vehicle type or manufacturer.

Was there any fine print for the previous EV tax incentives?

Yes. One rule limited the federal tax credit to the original buyer of a qualified EV or plug-in hybrid. There were a few other conditions:

• If you were leasing a vehicle, the credit stayed with the manufacturer that offered the lease since the manufacturer was the actual owner of the car. In most cases, the tax credit was factored into the lease cost so that the customer would benefit to some extent.
• The credit didn’t apply to an electric vehicle being purchased for the purpose of reselling it. That’s a gray area, though, and would be tough for authorities to prove.
• The vehicle had to be primarily used in the United States.
• Plug-in and battery electric vehicles had to be built by qualified manufacturers to be eligible for the full $7,500 credit.
• Plug-in hybrids and battery electric vehicles also had to have battery packs that were rated for at least 4 kWh of energy storage and were capable of being recharged from an external source.
• Manufacturers were not required to certify to the agency that vehicles met the requirements to qualify for the various credits. For vehicles not listed on the Department of Energy site or on the IRS list of qualified vehicles, a buyer could generally rely on the manufacturer’s representation that the vehicle was eligible. That statement could either be in writing or on the company’s website. The same thing went for electric motorcycles, plug-in, and EV conversions, three-wheel EVs, and low-speed EVs.

Are there tax credits from states or other sources?

Yes. While the federal tax credits for plug-in and natural gas vehicles get the most mention, there also are dozens of state and regional incentives on plug-in vehicles and those that use alternative fuels. Many states have a dozen or more programs. Many, however, apply only to businesses. Some credits come in the form of exemptions from fees and inspections. Others are non-monetary incentives such as carpool lane access and free parking.

Eligible buyers in some states may receive a tax credit, fee waiver, or rebate for the purchase of qualified alternative-fuel or electric drive vehicles.

In California, for example, people who buy or lease a new electric car can get a $750 cash rebate. That’s in addition to the federal tax credit, and the tandem can reduce the effective out-of-pocket cost of the car by up to $8,000. Plug-in hybrids are a little different. Because they have smaller batteries and burn gasoline part of the time, the reward is offered on a sliding scale depending on battery size, up to $750 under California’s Clean Fuel Reward program.

The U.S. Department of Energy also has an interactive chart of state incentives. It’s a good idea to be sure about available state and local incentives before you shop. Just because a state has a program doesn’t mean it will continue indefinitely.

How about fuel cell cars?

Hydrogen fuel cell electric vehicles do qualify for incentives in some states and are explicitly mentioned in the Inflation Reduction Act as qualifying vehicles. Take a look at the U.S. Department of Energy’s website to see the latest hydrogen laws and incentives.

FAQs

How did the previous electric vehicle tax credit work?
The federal tax-credit incentive would be worth $7,500 to someone whose tax bill next year is $7,500 or more. Suppose you bought a Hyundai Ioniq 5 EV or another eligible vehicle, and you owe $6,000 in income tax for that year. That’s all the tax credit will be. The IRS will not issue you a refund check for the other $1,500. For now, the electric vehicle tax credit remains nonrefundable so that it can bring your federal tax bill to zero, but it will not add to a potential tax refund. Starting in 2024, however, the EV credit will be immediately available at the time of purchase. If you bought an EV in 2022, you must complete and file IRS Form 8936 with your federal tax return to claim the credit. If you are leasing, the tax credit will go to the finance company, not you. The carmaker will likely factor the credit into the cost of the lease to lower your monthly payment, but it isn’t mandatory.

Is there still a federal tax credit for electric cars in 2022?
Yes and no, depending on when you purchased. Those who purchased an eligible electric car before the adoption of the Inflation Reduction Act on August 16, 2022, should qualify for the previous federal tax credit of up to $7,500. The exceptions are Tesla, Toyota, and General Motors, whose tax credits have been phased out but will return in 2023.  The tax credit is available on fuel cell and plug-in hybrid electric vehicles, but the amount of credit allowed for qualifying vehicles varies based on the battery size. After the Inflation Reduction Act in 2022, the number of vehicles that are eligible for EV tax credits will decrease. You can see a list of eligible vehicles in this article.

Does California have a tax credit for electric cars?
California offers rebates, as opposed to tax credits, for eligible vehicles. The rebates are for up to $750 for electric vehicles and plug-in electric vehicles, based on the size of the battery. Your local utility company might also offer an incentive on electric vehicles, so explore all your options.

Is there a tax credit for buying a Tesla in 2022?
No. Tesla has sold over 200,000 eligible electric vehicles, and all of its federal tax credits have been phased out. There are still state incentives available for buying a Tesla, so check with your state government’s transportation department. In 2023, the EV sales cap no longer applies, and Tesla customers will be eligible for the new tax credit. That said, the vehicle must fall under the pricing rules and income requirements discussed in this article.