Inflation Reduction Act: Electric Vehicle Tax Credit

The Inflation Reduction Act updated federal tax incentives for electric vehicles, aiming to make ownership more accessible. These credits are designed to lower the initial purchase price of qualifying new and used electric cars, encouraging a shift toward electrified transportation. The program provides a financial benefit to buyers either at the time of purchase or when filing taxes.

New Clean Vehicle Credit Eligibility

To qualify for the new clean vehicle credit, a buyer must meet specific income limitations. The credit is unavailable to individuals with a modified adjusted gross income (AGI) over $150,000, heads of household over $225,000, and married couples filing jointly over $300,000. A rule allows buyers to use the lower of their modified AGI from either the year they take delivery of the vehicle or the preceding year. This ensures that a temporary increase in income does not disqualify an otherwise eligible buyer.

The vehicle is subject to pricing and manufacturing requirements. The Manufacturer’s Suggested Retail Price (MSRP) cannot exceed $80,000 for vans, sport utility vehicles, and pickup trucks. For other vehicle types, the MSRP cap is $55,000. The vehicle’s final assembly must occur in North America, which buyers can verify for a specific vehicle by using the Vehicle Identification Number (VIN) decoder tool on the Department of Energy’s FuelEconomy.gov website.

The maximum credit of $7,500 is tied to battery sourcing and component requirements. A vehicle is disqualified if its battery contains any components manufactured or assembled by a Foreign Entity of Concern (FEOC). This restriction also extends to critical minerals, making a vehicle ineligible if its battery contains minerals extracted, processed, or recycled by an FEOC.

For vehicles meeting these standards, the $7,500 credit is divided into two parts. A vehicle can earn $3,750 if a percentage of its battery components are manufactured or assembled in North America. It can earn the other $3,750 if a percentage of the critical minerals in its battery are extracted or processed in the United States or a country with a U.S. free-trade agreement. These percentage thresholds increase annually, and a vehicle may qualify for one or both parts. The list of qualifying vehicles changes as manufacturers adjust supply chains, so verification at the time of purchase is necessary.

Previously-Owned Clean Vehicle Credit Eligibility

A separate tax credit is available for the purchase of a used electric vehicle, calculated as 30% of the sale price, with a maximum credit of $4,000. This incentive is designed to make electric vehicles more attainable for buyers at a lower price point. The eligibility rules for the used vehicle credit are distinct from those for new vehicles.

The income thresholds for the previously-owned vehicle credit are more restrictive. To qualify, a buyer’s modified AGI must not exceed $75,000 for single filers, $112,500 for heads of household, or $150,000 for those married filing jointly.

Vehicle eligibility for the used credit hinges on price and age. The sale price of the vehicle must be $25,000 or less. This price is determined before considering any trade-in value but after any dealer incentives. The vehicle’s model year 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-party sales are not eligible for this tax credit. Additionally, an individual can only claim the used clean vehicle credit once every three years. The buyer also cannot be the original owner of the vehicle.

Qualified Commercial Clean Vehicle Credit

Businesses and commercial entities can utilize the Qualified Commercial Clean Vehicle Credit, which operates under different rules than personal use credits. This credit is not constrained by the buyer income limits, vehicle MSRP caps, or the battery and mineral sourcing requirements that apply to the new clean vehicle credit. The credit amount is determined by the vehicle’s cost and whether it is a plug-in hybrid or fully electric.

This commercial credit has an indirect benefit for consumers who lease an electric vehicle. When a consumer leases an EV, the leasing company is the legal owner and can claim the Qualified Commercial Clean Vehicle Credit. Many leasing companies choose to pass the value of this tax credit on to the lessee. This is often done by offering a lower capitalized cost, which results in smaller monthly lease payments and broadens the range of affordable EV options.

Information Required to Claim the Credit

The dealer is required to provide a seller’s report containing key information about the transaction at the time of sale. This report must include the dealer’s name and taxpayer identification number (TIN), along with the buyer’s name and TIN. It also details the vehicle’s VIN, battery capacity, the date of sale, and the final sale price.

The dealer must provide this information to the buyer and also submit it electronically to the IRS through the IRS Energy Credits Online portal. If the dealer fails to complete this reporting at the time of sale, the vehicle becomes ineligible for the credit. The buyer should receive a copy of the successfully submitted report from the dealer as confirmation.

This information is used to complete IRS Form 8936, Clean Vehicle Credits. This is the official tax form where the buyer calculates and claims the credit. The data from the seller’s report corresponds to specific lines on Form 8936.

How to Receive the Credit

Buyers who qualify for a clean vehicle credit have two options for receiving its financial benefit. The first method is to transfer the credit to the dealer at the point of sale. This allows the credit to be applied directly as a cash rebate or a down payment, reducing the vehicle’s purchase price immediately.

To facilitate this transfer, the dealer must be registered with the IRS Energy Credits Online system. At the time of purchase, the buyer attests to their eligibility, and the dealer submits the sale information to the IRS through the online portal. The system provides a real-time confirmation of the vehicle’s eligibility. The dealer can then apply the credit amount directly to the sale.

Alternatively, a buyer can choose to claim the credit on their annual tax return. This is required if the dealer is not registered to handle point-of-sale transfers or if the buyer prefers this option. The credit is claimed by filing Form 8936 with their standard Form 1040 federal tax return. The credit amount is nonrefundable, meaning it will reduce the buyer’s total tax liability, but any excess amount is not paid out as a direct refund.