Electric Vehicle Tax Credits: What You Need to Know

06.03.2023
1120
11 min.

Electric vehicles (EVs) have gained popularity in recent years due to their environmentally-friendly nature and cost-saving benefits, including the availability of federal tax credits. To incentivize EV adoption, the US government offers tax credits for the purchase of eligible electric vehicles.

Electric Vehicle Tax Credits: What You Need to Know

It's important for EV buyers to understand the criteria for eligibility and the maximum amount of credit available, so they can make informed decisions and maximize their savings. This article will provide you with the essential information you need to know about electric vehicle tax credits.

What is an Electric Vehicle Tax Credit?

  • EV credit meaning. An electric vehicle tax credit is a government incentive aimed at encouraging the adoption of electric vehicles (EVs) by reducing their cost. The tax credit is available to individuals who purchase or lease an electric vehicle and can be claimed on the federal income tax credit. The EV tax credit has been in the Energy Policy Act since 2005 and has been extended and modified through various other acts, including the American Recovery and Reinvestment Act of 2009 and the Bipartisan Budget Act of 2018. The federal tax credit for electric vehicles varies depending on the model and make of the EV, but it can range from $2,500 to $7,500 per vehicle. To claim the tax credit, the EV must be purchased or leased new and meet certain criteria, such as being powered primarily by an electric motor.
  • Other tax credits. Besides the federal tax credit, some states also offer their own tax credits for electric vehicles. These state tax credits can be in the form of rebates, grants, or tax exemptions. They can vary widely depending on the state. The clean vehicle credit is a type of federal tax credit that was created to encourage the purchase of clean energy vehicles, including electric vehicles. The credit is calculated based on battery capacity and other factors and can be claimed on federal income tax returns.

How does an Electric Vehicle Tax Credit Work?

The EV tax credit is applied to the buyer's federal income tax bill and can reduce the amount of tax owed by the amount of the credit. To claim the credit, the buyer must have purchased or leased a qualifying electric vehicle, which must meet certain criteria, such as being powered primarily by an electric motor.

To claim the EV tax credit, the buyer must complete IRS form 8936 and attach it to their federal income tax return. The credit can only be claimed once for each vehicle purchased or leased.

The EV tax credit starts to phase out for a manufacturer once there has been sold 200,000 qualifying electric vehicles. This means that the credit will eventually be reduced or eliminated for buyers of EVs from manufacturers that have already reached this threshold.

The recent free trade agreement between the United States, Mexico, and Canada may have an impact on the EV tax credits in North America. The agreement requires the elimination of certain tax incentives for EVs, which could potentially reduce the value of the federal EV tax credit.

Which Vehicles Qualify for a Tax Credit?

The federal electric vehicle (EV) tax credit in the USA is a government incentive aimed at promoting the adoption of electric vehicles. The credit is available to individuals who purchase or lease a qualifying electric vehicle. The amount of credit varies based on the make and model of the vehicle.

Inflation Reduction act Requirements

To be eligible for the federal EV tax credit, a vehicle must meet certain criteria set forth by the inflation reduction act. The vehicle must:

  • Be a qualified plug-in electric vehicle
  • Be primarily powered by an electric motor
  • Have a vehicle identification number (VIN) that indicates it is a qualifying vehicle.

    Examples of vehicles that qualify for the federal EV tax credit include the Nissan Leaf, the Tesla Model S, and the Chevrolet Bolt. The credit is applied to the buyer's federal income tax bill and can reduce the amount owed by the amount of the credit.

    The EV tax credit price and income limits

    • Price limits. The maximum tax credit for a qualifying plug-in electric vehicle is $7,500. However, the credit amount phases out for a manufacturer after it has sold 200,000 qualifying vehicles. The credit will eventually be reduced or eliminated for buyers of EVs from manufacturers that have already reached this threshold. Additionally, the credit may be reduced or eliminated for vehicles that are sold at a higher price point.
    • Income limits. The eligibility for the electric vehicle tax credit is also limited by the buyer's income. The credit is only available to individuals with a federal income tax liability, and the amount of the credit may be limited based on the buyer's income. Generally, individuals with a higher income will be subject to a reduced credit amount.
    • Other limitations. In addition to being a qualified plug-in electric vehicle, the vehicle must also have a battery capacity of at least 5-kilowatt hours, and it must be capable of being recharged from an external source. This requirement helps to ensure that the vehicle meets the necessary criteria to be classified as an electric vehicle for tax credit purposes. In addition to the battery capacity requirements, there are other requirements that a vehicle must meet to qualify for the electric vehicle tax credit. For example, the vehicle must be primarily powered by an electric motor, and it must have a vehicle identification number (VIN) that indicates it is a qualifying vehicle.

    Tax credits for used EV

    The electric vehicle (EV) tax credit is not limited to only new vehicles. In some cases, buyers of used electric vehicles may also be eligible for a federal tax credit. The credit, also known as the plug-in electric drive vehicle credit, is designed to encourage the adoption of electric vehicles and may be available to individuals who purchase a used electric vehicle.

    To qualify for the electric vehicle tax credit on a used electric vehicle, the vehicle must meet certain criteria. First, the vehicle must be a qualifying electric vehicle, meaning it must be powered primarily by an electric motor and must have a battery capacity of at least 5-kilowatt hours. Additionally, the vehicle must be a new vehicle, meaning it must be sold by the manufacturer or its affiliate and must be new to the market.

    Check the vehicle history report of a used electric vehicle before purchasing it, as the credit may only be available if the vehicle was never claimed for the credit. A vehicle history report can provide information about the vehicle's previous ownership, accident history, and any other relevant information that may impact the vehicle's eligibility for credit.

    The amount of the electric vehicle tax credit available for used electric vehicles may be the same as the credit available for new vehicles. However, the credit amount starts to phase out for a manufacturer after it has sold 200,000 qualifying vehicles. It will eventually be reduced or eliminated for buyers of EVs from manufacturers that have already reached this threshold.

    FAQ

    How do I claim a federal tax credit for EVs?

    To claim the federal tax credit for an electric vehicle (EV) in the USA, you must have bought or leased a new qualifying EV. File IRS Form 8936 with your tax return to claim the credit, which can be up to $7,500 for passenger vehicles and $25,000 for commercial vehicles. The credit amount may vary depending on the specific model and the vehicle's battery size.

    Can I claim an EV tax credit if I sell my car?

    The federal tax credit for EVs in the USA can be claimed if the vehicle is purchased and placed into service during the tax year. If the vehicle is sold, the credit may not be claimed by the new owner. It's important to consult a tax professional for specific guidance on claiming the credit.

    How many times can I get an EV tax credit?

    The federal EV tax credit in the USA is a one-time credit, available once per eligible vehicle. It cannot be claimed multiple times for the same vehicle.

    Are federal tax credits for electric cars refundable?

    The federal tax credits for electric cars are not refundable but reduce the amount of taxes owed. They can only be claimed by those who owe federal taxes.
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