How Does the Used EV Tax Credit Work?

The federal government offers a tax incentive to encourage the adoption of electric vehicles, extending benefits to the secondary market. Officially titled the Credit for Previously-Owned Clean Vehicles and authorized under Internal Revenue Code Section 25E, this provision aims to make used electric and fuel cell vehicles more affordable. The program provides a tax credit of up to $4,000 for qualifying purchases.

Buyer Eligibility Requirements

To qualify for the used clean vehicle credit, a buyer must meet specific income criteria. The buyer’s Modified Adjusted Gross Income (MAGI) cannot exceed certain thresholds. For individuals filing as single, the MAGI limit is $75,000. The limit increases to $112,500 for those filing as head of household and to $150,000 for married couples filing a joint return. A buyer can use the lower of their MAGI from either the year they take delivery of the vehicle or the preceding year to qualify.

Beyond the income limits, several other personal qualifications apply. The purchaser must be an individual buying the vehicle for their own use. Furthermore, the buyer cannot be the original owner of the vehicle and cannot be claimed as a dependent on another person’s tax return.

There is also a limitation on how frequently a person can benefit from this tax provision. A buyer is permitted to claim the used clean vehicle credit only once every three years.

Qualified Vehicle and Seller Requirements

For a purchase to be eligible, both the vehicle and the seller must meet a distinct set of standards. The final sale price must be $25,000 or less. This price cap includes any dealer-imposed fees but excludes mandatory government charges like sales tax or registration fees. The value of a trade-in does not alter the sale price for this calculation.

The vehicle’s model year must be at least two years earlier than the calendar year of the purchase. For instance, a vehicle purchased during 2025 must be a 2023 model year or older. The vehicle must also be either a qualified fuel cell vehicle or a plug-in electric vehicle that has a battery capacity of at least 7 kilowatt-hours. Additionally, the vehicle cannot have been previously transferred to another qualified buyer after August 16, 2022.

The vehicle must be purchased from a licensed dealer, as private-party sales do not qualify for the tax credit. The dealer must be registered with the IRS through its Energy Credits Online portal.

At the time of the transaction, the registered dealer must provide the buyer with a time-of-sale report. This document contains the vehicle identification number (VIN), the final sale price, the vehicle’s battery capacity, and the names and taxpayer ID numbers of both the buyer and seller. The dealer must submit this report to the IRS within three days of the sale and provide a copy to the buyer.

Calculating and Claiming the Credit

The credit amount is 30% of the vehicle’s sale price, but it is capped at a maximum of $4,000. For example, if a qualifying vehicle is purchased for $10,000, the credit would be $3,000. If a vehicle is purchased for $20,000, the calculated credit would be $6,000, but it would be limited to the $4,000 maximum. Any vehicle with a sale price of approximately $13,333 or more will reach the full $4,000 credit amount.

Buyers have two options for receiving the credit. The first method is to transfer the credit to the dealer at the point of sale. This allows the dealer to apply the credit amount directly as a down payment or cash-equivalent reduction in the vehicle’s purchase price, providing an immediate financial benefit. This option is only available if the dealer is registered for the advance payment program through the IRS Energy Credits Online portal.

The alternative method is for the buyer to claim the credit on their annual tax return. In this scenario, the buyer pays the full purchase price upfront. When filing their federal income tax return for the year the vehicle was purchased, the buyer will claim the credit, which reduces their overall tax liability. If the credit exceeds the amount of tax owed, the excess amount is not refundable.

Regardless of which method is chosen, the buyer must complete and file IRS Form 8936, Clean Vehicle Credits, with their tax return.

Post-Purchase Considerations and Recapture Rules

Certain circumstances can require the buyer to repay the credit amount to the IRS, which is known as a recapture. The risk of recapture applies to buyers who opt for the immediate point-of-sale credit transfer. If a buyer takes the credit as an upfront discount but their final MAGI for the year of purchase exceeds the legal limit, they are required to pay back the entire credit amount when they file their taxes.

A buyer might qualify based on the prior year’s income at the time of purchase, but an unexpected salary increase or other income later in the year could push them over the limit. The responsibility for attesting to income eligibility rests with the buyer, and the IRS will collect the recaptured amount directly from the taxpayer, not the dealer.

The vehicle must be purchased for personal use, not for resale. If a buyer resells the vehicle within 30 days of taking possession, they become ineligible to claim the credit. If the credit was transferred at the point of sale in such a case, the IRS would seek repayment from the buyer.