How the IRA Electric Vehicle Tax Credit Works

The Inflation Reduction Act (IRA) has renewed and reshaped tax credits for electric vehicles, making them a factor in the affordability of cleaner transportation. These incentives are designed to encourage consumers and businesses to adopt electric vehicles (EVs) by lowering their initial cost. The credits are available for new, used, and commercial clean vehicles, each with its own set of rules and benefits.

New Clean Vehicle Credit Eligibility

Buyer Requirements

To qualify for the New Clean Vehicle Credit, a buyer must meet specific income limitations based on modified adjusted gross income (AGI). For married couples filing a joint tax return, the limit is $300,000. For those filing as head of household, the AGI cap is $225,000, and for all other filers, the limit is $150,000.

You can use the lesser of your modified AGI from either the year you take delivery of the vehicle or the preceding year. This provision allows you to choose the year with the lower AGI to meet the eligibility criteria.

Vehicle Requirements

A vehicle’s Manufacturer’s Suggested Retail Price (MSRP) cannot exceed $80,000 for vans, SUVs, and pickup trucks, or $55,000 for other vehicles like sedans. The vehicle must also have a battery capacity of at least 7 kilowatt-hours and undergo its final assembly in North America. The IRS maintains lists of qualifying vehicles for consumers to consult.

The total credit of up to $7,500 is divided into two parts, each worth $3,750. The critical minerals requirement mandates that for 2024 and 2025, at least 60% of the battery’s critical minerals value come from the U.S. or a free-trade agreement partner. The battery components requirement mandates that for the same years, at least 60% of the battery’s components value be manufactured or assembled in North America.

Used Clean Vehicle Credit Eligibility

Buyer Requirements

The modified adjusted gross income (AGI) limits for buyers of used clean vehicles are $150,000 for married couples filing jointly, $112,500 for heads of households, and $75,000 for all other filers. Buyers can use their AGI from the current or previous year, whichever is less.

Other qualifications also apply. The buyer cannot be the original owner of the vehicle and cannot be claimed as a dependent on another person’s tax return. A buyer can only claim the used clean vehicle credit once every three years.

Vehicle Requirements

For a used vehicle to qualify, its sale price must be $25,000 or less. This price includes dealer-imposed fees but excludes government taxes and registration fees. The model year of the vehicle must be at least two years earlier than the calendar year in which it is purchased.

The purchase must be made from a licensed dealer, as private sales do not qualify. The vehicle must also have a gross vehicle weight rating of less than 14,000 pounds and a battery capacity of at least 7 kilowatt-hours. A used vehicle is eligible for the credit only once in its lifetime, meaning the sale must be the first qualified transfer of the vehicle after August 16, 2022.

Qualified Commercial Clean Vehicle Credit

The tax credit for qualified commercial clean vehicles is available to businesses and tax-exempt organizations. Unlike the personal credits, there are no AGI or MSRP caps. The credit amount is the lesser of two figures: a percentage of the vehicle’s cost or the vehicle’s “incremental cost.”

The incremental cost is the price difference between the clean vehicle and a comparable internal combustion engine vehicle. The credit is 15% of the vehicle’s basis (or 30% if not powered by gas or diesel), capped at $7,500 for vehicles under 14,000 pounds and $40,000 for those weighing more. A leasing company can claim this credit and may pass the benefit on to the lessee, often as lower monthly payments.

Information and Documentation for Claiming the Credit

Required Seller-Provided Information

To claim a clean vehicle credit, the dealer is required to give the buyer a time-of-sale report. This report must include the buyer’s name and taxpayer identification number (TIN), the vehicle identification number (VIN), the date of the sale, and the total sale price. The report also confirms the vehicle’s eligibility and states the maximum credit amount for that vehicle.

The dealer must be registered with the IRS Energy Credits Online portal and submit this information electronically. If the dealer fails to provide this report to both the buyer and the IRS, the vehicle is ineligible for the tax credit.

Completing IRS Form 8936

Using the information from the seller’s report, the buyer must complete IRS Form 8936, Clean Vehicle Credits. This form is filed with the buyer’s annual federal tax return. The form requires the buyer to input details from the seller’s report, such as the VIN and the date the vehicle was placed in service. Form 8936 is used for claims for new, used, and commercial clean vehicles, with different parts of the form for each credit type.

How to Claim the Credit

Transferring the Credit at Point of Sale

Buyers can transfer their credit to the dealership at the time of purchase for an immediate benefit. The buyer must elect to transfer the credit and attest to their eligibility, including meeting the AGI limits. The dealer, who must be registered with the IRS, then verifies the vehicle’s eligibility in real-time through the IRS Energy Credits Online portal.

Once approved, the dealer can apply the credit amount as a rebate, reducing the purchase price or providing it as cash. If your final tax liability is less than the credit amount, you are not required to repay the difference to the IRS. The buyer must still file Form 8936 with their tax return to report the transfer.

Claiming the Credit on a Tax Return

A buyer can choose to claim the credit on their annual income tax return by filing Form 8936. The calculated credit amount is used to offset the buyer’s tax liability for the year. This is a nonrefundable credit, which means it can reduce the amount of tax owed to zero, but any excess credit amount is not paid out as a refund.

It is important to accurately project your income. If you take the credit but your modified AGI for the year ultimately exceeds the legal limit, you must repay the full amount of the credit to the IRS.