Do Hybrid Cars Qualify for a Tax Credit?
Do hybrid cars qualify for tax credits? Learn eligibility, credit amounts, and how to claim your clean vehicle incentive.
Federal tax credits encourage environmentally friendly transportation. These incentives help offset the initial cost of purchasing clean vehicles, making them more accessible. Understanding the requirements for these credits is important for taxpayers.
Qualifying Vehicle Characteristics
Clean vehicle tax credits apply to new and previously owned plug-in electric (PHEVs), electric (EVs), and fuel cell vehicles (FCVs). While PHEVs can qualify, hybrid electric vehicles (HEVs) without plug-in capability do not meet the criteria for these tax credits.
For a new clean vehicle to qualify, its final assembly must occur in North America. Consumers can verify a vehicle’s final assembly location by checking its Vehicle Identification Number (VIN).
Beyond assembly, the vehicle’s battery must have a capacity of at least 7 kilowatt-hours (kWh) for both new and used vehicles. New vehicles must also comply with critical mineral and battery component sourcing rules to qualify for the full credit amount.
For the critical mineral portion of the credit, a certain percentage of the battery’s critical minerals must be extracted or processed in the United States or a country with which the U.S. has a free-trade agreement, or be recycled in North America. This percentage reaches 60% in 2025. For the battery component portion, a percentage of the battery’s components must be manufactured or assembled in North America, also at 60% for vehicles placed in service in 2025. Beginning in 2025, vehicles cannot contain critical minerals sourced from a foreign entity of concern (FEOC) to qualify for the credit.
New clean vehicles must have a gross vehicle weight rating (GVWR) of less than 14,000 pounds to be eligible for the tax credit.
Purchaser and Transaction Requirements
Purchasers and transactions must meet clean vehicle tax credit criteria. For new clean vehicles, Modified Adjusted Gross Income (MAGI) limits are $300,000 for married couples filing jointly, $225,000 for those filing as head of household, and $150,000 for all other filers. Taxpayers can use their MAGI from either the year the vehicle is delivered or the preceding tax year, whichever is lower.
The credit applies to the purchase of new vehicles, but a separate credit exists for qualifying previously owned clean vehicles. For used vehicles, the MAGI limits are lower: $150,000 for married couples filing jointly, $112,500 for head of household, and $75,000 for other filers. Used vehicles must be purchased from a licensed dealer for a sale price of $25,000 or less and must be at least two model years older than the calendar year of purchase. They also cannot have been previously transferred for the used clean vehicle credit.
New vehicles have a Manufacturer’s Suggested Retail Price (MSRP) limit. The MSRP cannot exceed $80,000 for vans, sport utility vehicles, and pickup trucks. For all other vehicle types, the MSRP limit is $55,000. MSRP includes manufacturer-installed options and accessories but excludes destination fees and dealer-added items.
The vehicle purchase must be made from a licensed dealer. Dealers must submit a “time-of-sale report” to the IRS. Starting in 2024, buyers have the option to transfer the credit directly to the dealer at the time of purchase, effectively reducing the vehicle’s upfront cost.
Determining the Credit Value
The clean vehicle tax credit for new vehicles is up to $7,500, split into two $3,750 components. One portion covers critical mineral sourcing, the other battery component sourcing. Meeting both sets of criteria qualifies a vehicle for the maximum $7,500 credit.
If a new vehicle only meets one of the two sourcing requirements—either for critical minerals or battery components—it may still qualify for a partial credit of $3,750. Vehicles that fail to meet either set of requirements are not eligible for any portion of the credit.
The clean vehicle tax credit is non-refundable. The credit can reduce a taxpayer’s tax liability to zero, but it will not result in a refund if the credit amount exceeds the tax owed. Any excess credit is forfeited and cannot be carried forward. For previously owned clean vehicles, the credit amount is 30% of the sale price, capped at a maximum of $4,000, and is also non-refundable.
Steps to Claim the Credit
Taxpayers must claim the clean vehicle tax credit using IRS Form 8936. A separate Schedule A (Form 8936) is required for each qualifying vehicle placed in service.
To complete Form 8936, taxpayers will need information related to their vehicle purchase. This includes the Vehicle Identification Number (VIN), purchase and in-service dates, and licensed dealer information. Taxpayers should retain a copy of the dealer’s time-of-sale report for their records.
The completed Form 8936 should be filed along with the taxpayer’s federal income tax return. Even if the taxpayer opted to transfer the credit to the dealer at the point of sale for an immediate discount, filing Form 8936 and Schedule A is still necessary to report the transaction to the IRS. Maintaining purchase documentation is important for substantiating the credit claimed.