How the Federal Tax Credit for Electric Cars Works

The federal government provides tax incentives for the purchase of electric vehicles, known as the Clean Vehicle Credit. These incentives were reshaped by the Inflation Reduction Act of 2022, which introduced new eligibility rules. For buyers of new qualifying vehicles, the program offers a maximum credit of $7,500. This financial incentive is a tax credit, not a simple rebate, and is available for vehicles purchased until 2032.

Personal Eligibility for the New Clean Vehicle Credit

To qualify for the New Clean Vehicle Credit, a buyer must meet specific personal criteria, the most significant of which are the income limitations. These caps are based on a taxpayer’s modified adjusted gross income (MAGI). For a married couple filing a joint tax return, the MAGI must not exceed $300,000. The limit is $225,000 for individuals filing as head of household, and $150,000 for all other filing statuses.

To determine eligibility, a buyer can use the lesser of their MAGI from the year they take delivery of the vehicle or the preceding year. This provision offers flexibility if a buyer’s income fluctuates between the two years. For instance, if a person’s income is over the limit in the year of purchase but was under the limit in the prior year, they can still qualify for the credit.

Beyond the income rules, the buyer must be an individual purchasing the vehicle for their own use, not for resale. The person claiming the credit cannot be claimed as a dependent on someone else’s tax return. Finally, the vehicle must be used primarily within the United States to be eligible.

Vehicle Requirements for the New Clean Vehicle Credit

A vehicle must meet several requirements to be eligible for the New Clean Vehicle Credit, entirely separate from the buyer’s personal eligibility. These rules pertain to the vehicle’s price, battery, and manufacturing origins.

Manufacturer’s Suggested Retail Price (MSRP)

The vehicle’s manufacturer’s suggested retail price (MSRP) cannot exceed certain limits. For vans, sport utility vehicles, and pickup trucks, the MSRP cap is $80,000. For all other vehicle categories, such as sedans, the maximum MSRP is $55,000. This price is the retail price suggested by the manufacturer, including options and accessories, but excluding destination fees.

Battery Capacity

A vehicle must have a battery with a capacity of at least 7 kilowatt-hours (kWh). The battery must be rechargeable from an external source of electricity, which is why plug-in hybrid electric vehicles (PHEVs) can qualify alongside all-electric vehicles.

Final Assembly

A requirement is that the vehicle’s final assembly must take place in North America. The Department of Energy maintains a list of qualifying vehicles and provides a Vehicle Identification Number (VIN) decoder tool on its FuelEconomy.gov website. Prospective buyers can enter a specific vehicle’s VIN to confirm whether it meets the final assembly requirement before making a purchase.

Critical Mineral and Battery Component Requirements

The $7,500 credit is divided into two distinct parts, each worth $3,750, tied to the sourcing of the vehicle’s battery materials and components. A vehicle may qualify for one, both, or neither of these amounts.

A restriction involves materials from a Foreign Entity of Concern (FEOC), which includes companies owned by, controlled by, or subject to the jurisdiction of countries like China, Russia, North Korea, and Iran. Vehicles are ineligible for the credit if their batteries contain any components manufactured or assembled by an FEOC. Beginning in 2025, this exclusion expands to any critical minerals extracted, processed, or recycled by an FEOC.

The first $3,750 is contingent on the battery’s critical minerals. To qualify in 2025, at least 60% of the value of the critical minerals in the battery—such as lithium, cobalt, and nickel—must be extracted or processed in the United States or a country with which the U.S. has a free-trade agreement.

The second $3,750 of the credit depends on the battery’s components. For 2025, this requires that at least 60% of the value of the battery components must be manufactured or assembled in North America. The dual requirements for minerals and components mean buyers must verify which portion of the credit a specific model is eligible for at the time of purchase.

The Used Clean Vehicle Credit

For buyers not in the market for a new car, a separate tax credit is available for the purchase of a qualified used clean vehicle. This credit has its own distinct set of rules and lower financial thresholds compared to the new vehicle credit.

The credit amount for a used vehicle is 30% of the vehicle’s sale price, with a maximum credit of $4,000. To be eligible, the vehicle’s sale price must not exceed $25,000. The purchase must be made from a licensed dealer; private-party sales do not qualify for this credit.

The income limits for the used vehicle credit are substantially lower than for the new vehicle credit. The MAGI caps are $150,000 for married couples filing jointly, $112,500 for heads of household, and $75,000 for all other filers.

The model year of the used vehicle must be at least two years earlier than the calendar year in which it is purchased. For example, a vehicle purchased in 2025 must be a 2023 model year or older. A buyer can only claim the used vehicle credit once every three years, and an individual cannot be the vehicle’s original owner.

Required Information and Documentation

To claim a clean vehicle credit, the dealer must provide the buyer with a seller’s report at the time of purchase. This report contains all the necessary details for tax filing. The seller’s report must include:

• The dealer’s name and taxpayer identification number (TIN)
• The buyer’s name and TIN
• The vehicle identification number (VIN) and the battery capacity
• The date of sale and the final sale price
• The maximum credit the vehicle is eligible for (for new vehicles)

The dealer is required to submit this same information to the IRS electronically at the time of sale. This process creates a record that the IRS uses to verify a taxpayer’s claim.

How to Claim the Credit

A taxpayer claims the credit when filing their annual federal income tax return. Using the information from the seller’s report, the taxpayer will fill out Form 8936, Clean Vehicle Credits. This form is then submitted along with the standard Form 1040 tax return.

The Clean Vehicle Credit is non-refundable. This means the credit can reduce a taxpayer’s tax liability to zero, but no portion of the credit will be paid out as a cash refund if it exceeds the taxes owed.

However, buyers have the option to transfer their credit to the dealer at the point of sale. This allows the dealer to apply the credit amount directly as a discount on the vehicle’s purchase price. This transfer provides an immediate financial benefit, allowing a buyer to receive the full value of the credit as an upfront discount, regardless of their individual tax liability.