What is the electric vehicle tax credit?
The electric vehicle (EV) tax credit is a federal income tax credit available in the United States for individuals who purchase new electric vehicles. This incentive aims to encourage more consumers to go electric by lowering the upfront cost of purchasing an EV.
The EV tax credit originally came into effect with the Energy Improvement and Extension Act of 2008. It has been extended and modified over the years, most recently with the Inflation Reduction Act signed in August 2022.
Essentially, the EV tax credit allows you to reduce your federal income tax bill by up to $7,500 for purchasing a new plug-in electric vehicle. The credit amount you can claim depends on the capacity of the EV’s battery.
How the 2023 EV tax credit works
For 2023, the EV tax credit system has been overhauled to focus the incentives on American-made vehicles. There are new requirements regarding battery component sourcing and critical mineral extraction.
The key changes are:
- The credit amount depends on where the EV battery materials are sourced and assembled. To qualify for the full $7,500 credit, the battery components must be manufactured or assembled in North America.
- Critical battery minerals need to be extracted or processed in the U.S. or a country the U.S. has a free trade agreement with. This includes lithium, cobalt, nickel, and graphite.
- There are price caps – $55,000 for sedans, $80,000 for vans, SUVs and trucks.
- The tax credit only applies to brand new vehicle purchases. Pre-owned EVs no longer qualify.
- Higher income limits have been set – individuals with adjusted gross incomes of over $150,000 or couples over $300,000 no longer qualify.
So in summary, the revamped EV tax credit aims to boost American manufacturing of EVs, batteries and minerals. Purchasers of American-made electric vehicles can benefit from significant credits.
What information do you need from a seller to claim the tax credit?
To claim the EV tax credit when filing your taxes, you will need documentation from the vehicle seller stipulating:
- Make, model, year of the EV purchased
- VIN number
- Purchase date
- Purchase price
This documentation could be the purchase agreement, invoice, or other paperwork associated with buying the EV.
The seller also needs to provide a written acknowledgment that the vehicle qualifies for the EV tax credit. This statement needs to indicate:
- The manufacturer, make and model.
- Confirmation that the seller transferred the EV to you.
- The amount of any EV tax credits received by the seller.
- The VIN number.
So be sure to get this necessary paperwork from the seller when purchasing the EV. Keep it along with your other tax documents to substantiate your EV tax credit claim.
How the electric vehicle tax credit is calculated
The amount of federal tax credit available depends primarily on the capacity of the EV battery, according to the following ranges:
- $7,500: EVs with a battery capacity of at least 40 kWh
- $3,750: Battery capacity of at least 5 kWh but less than 40 kWh
- $1,875: Battery capacity less than 5 kWh
Note that the battery capacity thresholds to qualify for the maximum credit increased from 16 kWh and 30 kWh with the changes made in 2022.
The EV tax credit is non-refundable, meaning it just reduces your tax liability for the year. If you do not have at least $7,500 in federal tax liability, your credit will be less.
- If you owed $10,000 in federal taxes, and bought an EV with a 60 kWh battery, you could reduce your tax bill by the full $7,500 credit.
- If you owed $5,000 in taxes, your EV tax credit would max out at $5,000.
The credit amount phases out once an automaker sells over 200,000 qualifying EVs in the U.S. market. The phase out schedule reduces the credit to 50% for 2 quarters, then 25% for 2 quarters before being phased out completely.
Which cars qualify for a federal EV tax credit?
The number of EV models eligible for the federal tax credit is constantly evolving. Here are some of the models that currently qualify:
Full $7,500 credit:
- Ford F-150 Lightning and E-Transit
- Rivian R1T, R1S
- Lucid Air and Lucid Gravity
- Nissan Leaf (models with battery over 40 kWh)
- BMW i4
- VW ID.4 and VW Buzz
- Hyundai Ioniq 5 and Kia EV6
Phased out credits:
- Tesla and Chevrolet vehicles no longer qualify
- Nissan Leaf under 40 kWh qualifies for $1,875
The EPA website provides full lists of qualifying vehicles under the old and new credit rules. The requirements can also differ by when the specific EV was purchased.
It’s important to always check the latest EPA qualifying lists before purchasing to be sure you will be able to claim the tax credit amount you expect.
How to claim the federal EV tax credit
Claiming the credit after buying your new electric vehicle is straightforward:
- Purchase a qualifying EV as your own personal vehicle, either financed or leased. Business purchases do not qualify.
- Obtain the required purchase documentation from the seller, as outlined above.
- When filing your federal tax return for the year you acquired the EV, complete IRS Form 8936. This 1-page form is specifically for the EV tax credit.
- Submit Form 8936 with your tax return paperwork. The amount you qualify for will be applied to reduce your total tax obligation.
- If owed a refund, you will receive the amount of EV tax credit you qualify for, up to $7,500. This portion of your refund comes separately from your regular tax refund.
The IRS may request to see your paperwork validating the EV purchase and tax credit qualifications, so retain this documentation along with your tax return records.
Leasing and the EV tax credit
If you lease an eligible EV rather than buying, you may still be able to take advantage of the federal tax credit, but the rules differ.
For a leased EV, it is the automaker or lender financing the lease that claims the tax credit, not you as the lessee. The benefit is then passed along to you by applying it to reduce your lease payments.
To qualify for this leasing arrangement, the lease term must be at least 2 years for the full $7,500 credit. Shorter lease terms mean smaller credits.
When leasing, you do not have to actually file anything with your tax return. The leasing agent handles claiming the credit to lower your payments. But you do need to be eligible based on income limits and other factors.
EV rebates and incentives
In addition to the federal EV tax credit, many state and local governments also offer rebates, tax credits, and other incentives for buying an electric vehicle or installing home EV charging equipment.
Examples of state-level electric vehicle incentives include:
- California – up to $7,000 cash back
- New York – up to $2,000 rebate
- Colorado – tax credits up to $5,000
- Massachusetts – rebates up to $2,500
Some utility companies also offer rebates on home EV charger installation. And a federal tax credit covering 30% of charging equipment costs is available through 2032.
When considering an EV purchase, be sure to check what federal, state, utility, and other incentives are offered in your area to maximize your savings. The EPA website is a great resource for finding EV incentive programs by state.
Understanding the IRS and its Functioning
The Internal Revenue Service (IRS) is the federal agency responsible for tax collection and enforcement in the United States. Here is an overview of the IRS and how it functions:
- The IRS is a bureau of the Department of the Treasury. It was created in 1862 to collect income tax to fund the Civil War effort.
- Today the IRS collects over $4 trillion each year in individual and corporate income taxes, payroll taxes, estate taxes, gift taxes, and excise taxes.
- The agency employs around 80,000 people, including auditors, collectors, appeals officers, and clerical staff.
- The IRS has four main divisions: Individual & Business Income Tax Returns, Large Business & International Taxpayers, Wage & Investment Tax Returns, and Tax Exempt & Government Entities.
- It processes over 250 million tax returns each year, issues $400 billion in tax refunds, and provides guidance on tax laws and regulations.
- The IRS handles audits of tax returns, tax litigation in the courts, and pursuing criminal tax evasion cases with the Department of Justice.
- Taxpayer assistance is provided through the IRS website, published guides, call centers, and local offices known as Taxpayer Assistance Centers.
- The agency is led by a Commissioner appointed by the President and approved by the Senate. Charles P. Rettig is the current IRS Commissioner.
- Budget cuts over the past decade have reduced the IRS workforce and made it more challenging to enforce tax laws and serve taxpayers promptly.
Eligibility Criteria for Claiming EV Tax Credits
If you are considering claiming federal tax credits for purchasing a new electric vehicle, it is important to understand the eligibility requirements:
- The tax credit only applies to new EV purchases – used EVs do not qualify. Leased vehicles may qualify if the lease term is at least 2 years.
- The EV must be acquired for personal or business use. EVs purchased for resale do not qualify.
- Final assembly of the vehicle must be in North America to qualify for the full credit amount.
- Total income limits apply based on adjusted gross income and tax filing status. Single filers with income exceeding $150,000 and joint filers over $300,000 do not qualify.
- The EV must be acquired in the tax year you intend to claim the credit, and it must be in your possession before filing taxes.
- The credit is non-refundable, so you must have at least $7,500 in federal tax liability to claim the maximum amount.
- Taxpayers can only claim credits up to their share of the total vehicle price. If two people jointly purchase an EV, they must split the credit.
-Credits can generally only be claimed once per unique VIN number, even if the vehicle changes owners.
Be sure to review the latest IRS guidelines thoroughly before claiming EV tax credits. Proper documentation validating eligibility is required.
How to Claim EV Tax Credits on Your Tax Return?
The process for claiming your electric vehicle tax credit is integrated right into your annual federal tax return process. Here is how it works:
- Purchase a new qualifying EV within the current tax year. Retain paperwork showing make, model, VIN, and purchase details.
- In early 2024 when preparing your 2023 taxes, obtain IRS Form 8936 – Qualified Plug-In Electric Drive Motor Vehicle Credit.
- Complete IRS Form 8936 with your qualifying EV’s make, model, VIN, date acquired, and credit amount you calculate.
- Submit the completed Form 8936 with your other tax documents when you file your 1040 return.
- The dollar amount on Form 8936 will be applied to reduce your total federal tax obligation or increase your refund.
- Keep copies of your tax return and Form 8936 on file along with your EV purchase paperwork in case the IRS requests them later for verification.
The IRS will process Form 8936 and incorporate any EV tax credit you qualify for into your final tax calculations and refund determination. Carefully entering the EV details and credit amount helps ensure accurate processing.
IRS Guidelines for Claiming EV Tax Credits
The IRS has detailed regulations around electric vehicle tax credits – here are some key guidelines to ensure compliance:
- The EV must be acquired in the same or prior year you claim the credit.
- Detailed EV purchase documentation must be retained as proof for potential IRS review.
- Taxpayers can only claim credits up to the portion of the EV purchase price they personally paid.
- The credit is non-refundable, so tax liability of at least $7,500 is required to maximize the credit.
- Total income thresholds apply – single filers with income over $150,000 and joint filers over $300,000 do not qualify.
- Used EVs do not qualify, nor do vehicles purchased for resale. The credit only applies to new personal-use vehicle purchases.
- For leased vehicles, the leasing company claims the credit to reduce payments. Lessees cannot claim EV credits directly.
- EV credits can only be claimed once per unique VIN number, even if ownership changes.
- Credits for jointly purchased EVs must be split between taxpayers according to how much each person paid.
Strictly following all IRS guidance ensures you qualify for EV tax credits you are entitled to without IRS penalty. Consulting a tax professional is recommended if unsure.
Comparing Federal and State EV Tax Credit Programs
While a federal electric vehicle tax credit is available nationwide, many states also offer additional EV tax credits and incentives:
Federal EV Credit
- Up to $7,500 credit amount
- For new EV purchases only
- Battery capacity minimums
- Manufacturer sales caps
- Income eligibility limits
State EV Credits
- Amounts vary, up to $7,000 in some states
- May apply to used EVs and leases
- Often bonus credits for low income buyers
- Require purchase or registration in that state
- Some states offer rebates instead of tax credits
- Utility company incentives sometimes available
In general, state EV tax credits are complementary to the federal credit, allowing buyers to maximize overall savings through combined incentives. Checking programs in your particular state is recommended.
The federal credit focuses on battery size, American manufacturing, and purchase prices. State credits help broaden accessibility through used EV and income level adjustments. Understanding both federal and state specific EV tax policies provides the best opportunity to maximize savings as an environmentally-conscious EV buyer.
EV Tax Credit vs Other Green Incentives
The electric vehicle tax credit aims to make EV purchases more affordable. There are also federal tax credits available encouraging other environmentally friendly upgrades:
Home Charging Credit
- 30% credit for EV charging station costs
- Max $1,000 for individuals
Solar Panel Credit
- 22% credit for installing solar panels
- No maximum
Energy Efficiency Upgrades
- Tax credits for items like windows, doors, HVAC
- Varying credit amounts
Electric Bike Credit
- 30% credit up to $750 for electric bicycle purchases
So in addition to the purchase incentive for new EVs, federal credits also exist to support installing home EV chargers, solar, and energy efficiency. Plus, buying an electric bike also qualifies for a tax break.
Leveraging these credits together provides homeowners a way to fully embrace environmentally-friendly infrastructure upgrades and transportation options while offsetting costs through tax savings. Consult your tax advisor to utilize available “green” credits.
Future of EV Tax Credits in the US Tax System
Electric vehicle tax credits have accelerated EV adoption since 2008, but the program faces uncertainty going forward:
- Credit amounts may need adjustment as EV costs decrease over time.
- Once manufacturers hit sales caps, credits phase out unless Congress acts to extend them.
- Income eligibility limits could be added or adjusted.
- Credit qualifications may shift if sourcing or manufacturing requirements change.
- Administration or Congressional politics can impact incentive policy priorities.
Several modifications have already occurred over the years to balance EV promotion, affordability, and budget impacts. Further changes are likely to continue optimizing and evolving the credits.
Support remains broad among both political parties for incentivizing American EV manufacturing and expanding transportation electrification. So while the specific structure may fluctuate, federal EV tax credits are poised to remain a key incentive driving the electric mobility transition.
Common Myths and Misconceptions About IRS and EV Tax Credits
Some common misconceptions exist around IRS electric vehicle tax credits. Here are the facts behind some EV tax credit myths:
Myth: Used EVs qualify for the credit
Fact: Only new EVs qualify, used vehicles do not.
Myth: Any electric car purchase gets the full $7,500
Fact: Battery capacity minimums determine credit eligibility and amount.
Myth: Taxpayers can claim credits repeatedly
Fact: Credits can only be claimed once per unique VIN number.
Myth: There are no limits on buyer income
Fact: Income caps phase-out credit eligibility over certain thresholds.
Myth: The credit is immediately applied at purchase
Fact: Filers must claim the credit on next tax return after buying the EV.
Myth: Dealers handle credit paperwork
Fact: Buyers must supply proper documentation and file IRS Form 8936.
Myth: Leasing an EV allows you to directly claim the credit
Fact: Only the leasing company claims credits on leased EVs to reduce payments.
Myth: Businesses can claim EV tax credits
Fact: The credit only applies to vehicles purchased for personal use.
Getting the real facts on IRS EV tax credit rules prevents misunderstandings that could lead to confusion or lost incentives. Consult the IRS website or a tax professional for assistance.
Expert Tips for Maximizing Your EV Tax Credits
If seeking to purchase a new electric vehicle and leverage associated federal tax credits, here are some expert tips:
- Review IRS requirements thoroughly and keep detailed purchase records.
- Compare state credits and rebates you may also qualify for.
- Look into other “green” credits like for solar, chargers, and bikes.
- Choose EV models and battery sizes to maximize credit amounts.
- Optimize credit timing with your income fluctuations and tax liability.
- Consider leasing if the leasing company passes the credits through via lower payments.
- Split credits fairly on jointly purchased EVs based on payment portion.
- Retain all IRS documentation for at least 3 years after claiming credits.
5 additional FAQs related to the IRS EV tax credit
Does the EV tax credit increase the resale value of my car?
The EV tax credit is not directly factored into used EV pricing and resale valuations. However, having previously qualified for the tax credit can make your used EV more attractive to buyers by indicating the vehicle meets battery size and range requirements. This may help boost resale value slightly.
Can I claim the credit if I Finance the EV purchase?
Yes, financing an EV purchase does not impact eligibility for the federal tax credit. As long as you individually purchase the EV for personal use and meet all other requirements, you can claim the credit whether you pay in cash or finance through an auto loan.
Do EV leases over 2 years qualify for the full $7,500 credit?
No. For leased EVs, credits above $3,750 require lease terms of at least 5 years. A 3-year lease qualifies for a $5,000 credit, and a 4-year lease gets $6,250. Only leases 5 years or longer receive the full $7,500.
Can I claim the credit on an EV purchased outside the US?
No, only new EVs purchased in the United States are eligible. Vehicles must meet domestic assembly requirements outlined by the IRS, and foreign vehicle purchases do not qualify for this American incentive program.
If I install EV charging at home, do I have to claim that credit separately?
Yes. The home EV charger tax credit (max $1,000) must be claimed separately from the new EV purchase credit. Submit Form 8911 for the charger credit when filing taxes the year it was installed. The credits have different rules and requirements.
The federal electric vehicle tax credit provides substantial savings up to $7,500 on new EV purchases. With more stringent battery sourcing requirements starting for 2023, careful research into the latest IRS regulations is important to maximize potential credits.
There are also complementary state EV incentives, along with credits for home charging, solar panels, and other environmentally friendly upgrades. Combining federal and state credits allows buyers to offset a significant portion of their EV and charger costs through tax savings.
This incentive program aims to accelerate electric vehicle adoption in the coming years. But income caps and manufacturer sales limits may impact credit availability going forward. Staying up to date on the latest IRS EV tax credit rules ensures buyers can fully benefit during this transformative period in electric transportation.