EV Tax Credit Explained - 2023 Updates
The IRS offers tax incentives for taxpayers who take environmentally-conscious initiatives such as purchasing an electric vehicle (EV), but in the same way that the technology surrounding electric vehicle manufacturing continues to evolve, the rules and regulations regarding the electric vehicle tax credit are revised annually. While the tax incentive to encourage the purchasing of cleaner transportation vehicles is prevalent with the EV tax credit, it is important to consider the details if you hope to claim tax breaks regarding this purchase.
TABLE OF CONTENTS
- An EV tax credit is a clean vehicle tax credit that can help reduce the tax liability for taxpayers who purchased an electric vehicle in 2023.
- To be eligible for the EV tax credit, taxpayers must earn below the maximum modified adjusted gross income for their filing status, intend to use the vehicle for personal use, and use the vehicle primarily in the U.S.
- Taxpayers can claim the EV tax credit by filling out the IRS Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit.
- The EV tax credit is a non-refundable tax credit with a maximum credit amount of $7,500.
Facts and Statistics:
- Taxpayers must have a modified adjusted gross income (AGI) of less than $225,000 for heads of households, $300,000 for married couples filing jointly, and $150,000 for other filers to be approved for the EV tax credit.
- Electric vehicles must have a battery capacity of 7 kilowatt-hours, a gross vehicle weight rating of fewer than 40,000 pounds, and be produced by an IRS-qualified vehicle manufacturer that conducts the final assembly in North America.
What Is An EV Tax Credit?
An EV tax credit is a clean vehicle tax credit that can help reduce the tax liability for taxpayers who purchased an electric vehicle in 2023. The EV credit amount can be as much as $7,500 for qualifying taxpayers who purchase a qualified electric vehicle within the related time frame outlined by the IRS.
EV Tax Credit Requirements
There are certain requirements an individual and their desired vehicle must meet to be considered eligible for the EV tax credit.
Qualifying individuals or businesses may be eligible for a tax credit of up to $7,500 under Internal Revenue Code Section 30D if they purchase a new, qualifying fuel cell electric vehicle (FCEV) or plug-in electric vehicle (EV). The rules for this tax credit were adjusted due to the Inflation Reduction Act of 2022. Now, electric vehicles must be purchased between 2023 to 2032 to be considered for this tax credit.
The qualifier must:
- Purchase the vehicle for their own personal use and not with the intention of reselling
- Use the vehicle primarily in the U.S.
In addition to those requirements, the taxpayer must have a modified adjusted gross income (AGI) that does not exceed:
- $225,000 for the head of household
- $300,000 for married couples who are filing jointly
- $150,000 for other filers
People who are interested in purchasing an electric vehicle with the goal of claiming the related tax credits have the ability to utilize the modified AGI from either the year the vehicle was purchased or the year prior. You can use your income from the year you earned less in relation to the EV tax credit. As long as your modified AGI was less than the maximum requirement for one of the two years, you can claim the EV tax credit.
Clean Vehicle Qualifications
There are certain requirements a vehicle must meet to be considered eligible for a clean vehicle tax credit.
An EV must:
- Contain a battery with a capacity of at least 7 kilowatt-hours
- Have a gross vehicle weight rating that is fewer than 40,000 pounds
- Be produced by an IRS-approved qualified manufacturer
- Have its final assembly in North America
The sale of a clean vehicle qualifies for the tax credit if:
- The vehicle is purchased new
- The seller of the vehicle provides the required information to the buyer at the time of the sale and to the IRS, including your name and taxpayer identification number
Finally, the manufacturer suggested retail price (MSRP) of the vehicle must not exceed:
- $80,000 for pickup trucks, sport utility vehicles, and vans
- $55,000 for other vehicles
It should be noted that the MSRP is not necessarily the same as the amount you pay for the car.
EVs Purchase Deadlines
EVs purchased on or before August 16, 2022, and placed in service before January 1, 2023
The electric vehicle credit can be claimed for an eligible electric vehicle that was purchased on or before August 16, 2022, and placed in service before January 1, 2023.
EVs purchased and taken possession of after August 16, 2022, and before January 1, 2023
Taxpayers can claim a clean vehicle credit if they purchased and took possession of their electric car after August 16, 2022, and before January 1, 2023. The credit is valid as long as the vehicle was assembled in North America.
Upcoming Changes to Tax Credit Rules in 2023
- Critical minerals: According to a document issued by the Treasury Department, a certain share of the critical minerals in a qualifying car’s battery must be “extracted or processed in the United States, or in any country with which [it] has a free trade agreement in effect, or recycled in North America.” The percentage of that share is expected to rise over time in the following increments: 40% in 2023, 50% in 2024, 60% in 2025, 70% in 2026, and 80% thereafter.
- Battery Components: Starting in 2023, at least 50% of a vehicle’s battery components must be manufactured or assembled in North America, including battery cells and modules. In 2024 this share will grow to 60% and will increase gradually until it reaches 100% by 2029.
How To Claim The EV Tax Credit
Taxpayers who want to claim the EV tax credit must fill out the IRS Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit when they file their tax return. It is important to have the correct vehicle identification number on hand when completing this form.
Is The EV Tax Credit Refundable?
The EV tax credit is non-refundable, which means if the credit is worth more than what you owe in taxes, you cannot claim the excess credit as a refund or apply it for future tax payments. Therefore, only eligible taxpayers who owe at least $7,500 in tax liability for the current tax year would receive the full benefit.
Taking advantage of tax benefits such as credits and deductions is one of the best strategies to save money during the tax season. If you need advice about navigating your eligibility for tax breaks or want to confirm that everything is correct in your tax return, consulting with a professional at Ideal Tax will ensure you maximize your tax benefits.