Electric Vehicle Tax Credits: What You Need to Know

The electric vehicle (EV) tax credit is a federal benefit designed to make clean vehicles more accessible by offering incentives to those who buy qualifying electric, plug-in hybrid, or hydrogen-powered vehicles. This can be a big savings for buyers, up to $7,500 for new and up to $4,000 for used. While the idea is to promote environmentally friendly transportation, recent policy changes and requirements have made it important for consumers to know about eligibility and the details.

What Is the EV Tax Credit?

The EV tax credit is a federal incentive to lower the cost of buying electric and plug-in hybrid vehicles. This is not a tax refund, it’s a nonrefundable credit which means it can only reduce your tax liability and not result in a cash refund. As of 2024 you can transfer the credit to an eligible dealer and get an immediate discount at the point of sale instead of waiting till tax time.

The goal of the program is to encourage consumers to buy electric vehicles and grow the North American supply chain for clean vehicle technologies. New regulations like income limits, price caps, and strict manufacturing and sourcing requirements make the credit available to more buyers and align with long-term sustainability and energy independence goals.

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How the EV Tax Credit Works

The EV tax credit has been a key driver of electric vehicle adoption in the US since 2008. It’s an incentive to encourage clean energy use. The Inflation Reduction Act of 2022 overhauled the program to boost domestic EV production, batteries, and raw materials. As a result, vehicles not built in the US are no longer eligible and buyers must meet income, price, battery, and assembly requirements.

Starting in 2024 buyers can either claim the credit on their tax return or transfer it to a dealer for an immediate discount on the vehicle’s purchase price. This makes it simpler and more convenient to get an EV at the point of sale. The updated credit is part of a broader effort to promote clean energy and reduce pollution.

Who Qualifies

Qualified Vehicles Requirements

New Clean Vehicles

• Battery capacity. A vehicle must have a battery capacity of at least 7 kilowatt-hours to qualify for the credit.

• Weight limit. The vehicle must have a gross vehicle weight rating (GVWR) of less than 14,000 pounds.

• Final assembly in North America. The vehicle must be assembled in North America to meet eligibility criteria.

• Critical mineral and battery component requirements. As of April 18, 2023, the vehicle must meet specific critical mineral and battery component requirements.

• Price caps. The MSRP must not exceed $80,000 for vans, SUVs, and trucks, and $55,000 for other vehicles.

• Manufacturer information. The seller must provide specific information about the vehicle including VIN and the vehicle’s final assembly location to both the buyer and the IRS.

Used Clean Vehicle

• Sale price. The vehicle’s sale price must be $25,000 or less including all dealer-added costs but excluding taxes, title, registration fees, or any fees required by law.

• Model year. The vehicle must be at least two years older than the calendar year in which you buy it. For example, if you buy it in 2023 the model year must be 2021 or older.

• No prior transfer. The vehicle must not have been sold to another qualified buyer after August 16, 2022.

• Weight limit. The vehicle must have a GVWR of less than 14,000 pounds.

• Eligible vehicle type. The vehicle must be a plug-in electric vehicle (EV) or fuel cell vehicle (FCV) with a battery capacity of at least 7 kilowatt-hours.

• Primary use in the U.S. The vehicle must be used in the United States.

• Dealership purchase. The vehicle must be bought from a licensed dealer who reports the required information to both the buyer and the IRS. The credit cannot be claimed on vehicles purchased from a private party.

• Not available to dealers for resale. The credit is not available if the vehicle is purchased by a dealer for resale.

• Credit use. The credit can only be claimed once every three years for the same vehicle.

Qualifying Electric Vehicles

The list of qualifying new electric and plug-in hybrid vehicles for the EV tax credit is constantly changing. Vehicles are added or removed based on compliance with program requirements, so it’s crucial to check for updates regularly. 

How to Claim the Tax Credit

Claim on Your Tax Return

To claim the tax credit on your taxes, file Form 8936 with your federal income taxes. The credit is nonrefundable, so it can reduce or eliminate your tax liability, but any excess credit won’t be refunded or carried over to future years. You can only claim the credit for the year the vehicle was delivered to you, not when you bought it. For example, if you bought it in 2023, but it was delivered in 2024 you must claim it on your 2024 tax return.

Transfer to the Dealer

Alternatively, you can transfer the credit to the dealer for an immediate discount at the point of sale. This allows you to get the benefit upfront, but you must still report the transaction on your tax return. You’ll need to fill out Form 8936 and provide the VIN when you file your taxes. If your income exceeds the eligibility limits, you’ll need to repay the IRS for any improper benefit received.

What You Need to Claim the EV Tax Credit

EV Rebates and Incentives

EV rebates and incentives go beyond the federal tax credit. Many states and local governments offer additional savings. California’s Clean Air Vehicle program for example grants carpool lane access to certain electric vehicles, and New York provides a state rebate of up to $2,000 on top of the federal credit. But check the rules, some states may not allow you to combine incentives. Always review state policies to maximize your savings without violating any eligibility rules.

Conclusion