Is There a Tax Credit for Buying a New Car?

While a broad tax credit for any new car does not exist, federal incentives encourage the adoption of clean energy vehicles. The primary incentive is the Clean Vehicle Tax Credit, which can help offset the upfront cost of qualifying electric, plug-in hybrid, and fuel cell vehicles. It is important to note that this credit is set to expire for vehicles acquired after September 30, 2025. Understanding these criteria is important for consumers.

Clean Vehicle Tax Credit Overview

The Clean Vehicle Tax Credit offers up to $7,500 for purchasing new electric, plug-in hybrid, and fuel cell vehicles. This credit is nonrefundable, meaning it can reduce a taxpayer’s tax liability to zero, but any amount exceeding the tax owed will not be issued as a refund. All federal EV tax credits are set to expire for vehicles acquired after September 30, 2025.

Vehicle Eligibility Criteria

To qualify for the Clean Vehicle Tax Credit, a vehicle must be new and purchased for use, not resale. It must undergo final assembly in North America. Qualifying vehicles generally require a battery capacity of at least 7 kilowatt-hours.

For 2025, at least 60% of the value of critical minerals must be extracted or processed in the United States or a free trade agreement country, or recycled in North America. Similarly, at least 60% of the value of battery components must be manufactured or assembled in North America. Beginning in 2025, vehicles cannot contain any critical minerals from a foreign entity of concern.

Manufacturer’s Suggested Retail Price (MSRP) limits also apply. For vans, SUVs, and pickup trucks, the MSRP cannot exceed $80,000. For sedans and all other vehicle types, the MSRP limit is $55,000.

Buyer Eligibility Criteria

Buyers must meet specific Modified Adjusted Gross Income (AGI) limits. For married couples filing jointly or surviving spouses, the Modified AGI cannot exceed $300,000. For head of household filers, the limit is $225,000. For all other filers, including single individuals, the limit is $150,000.

Taxpayers can use their Modified AGI from either the year the vehicle was placed in service or the preceding year, whichever is less. The vehicle must be purchased for the buyer’s own use, not for resale or primarily for business use. The buyer cannot be claimed as a dependent on another taxpayer’s tax return. Each specific vehicle is only eligible for the credit once.

Claiming the Credit on Your Tax Return

To claim the Clean Vehicle Tax Credit, taxpayers must use IRS Form 8936, “Qualified Plug-in Electric Drive Motor Vehicle Credit.” Taxpayers will need specific information from the vehicle purchase, including the Vehicle Identification Number (VIN), the date the vehicle was placed in service, and details from the seller report.

For vehicles placed in service after 2023, the seller must have filed a seller report through the IRS Energy Credits Online (ECO) portal for the vehicle to be eligible. The completed Form 8936 is then submitted with the taxpayer’s annual federal income tax return.

Point-of-Sale Transfer Option

Beginning January 1, 2024, buyers of new and used clean vehicles can transfer the Clean Vehicle Tax Credit directly to the dealership at the time of purchase. This allows the buyer to receive the credit as an immediate upfront discount on the vehicle’s price, rather than waiting to claim it when filing their tax return.

The dealership must be registered with the IRS Energy Credits Online (ECO) portal and will submit the necessary information through this system. Buyers must sign an attestation confirming they meet the AGI limits and provide other required personal information to the dealer.

A potential for repayment exists with this point-of-sale transfer. If the buyer’s actual Modified AGI for the tax year of purchase exceeds the applicable income limits, they may be required to repay the credit amount to the IRS when they file their tax return. Buyers who opt for this transfer must still report the transaction on their tax return using Form 8936 and Schedule A to reconcile the advance payment.