The EV tax credit is a pivotal incentive for encouraging the adoption of electric cars. Understanding its nuances is crucial for potential buyers and those interested in sustainable transportation. In this blog, we will learn how the electric car tax credit works, whether it is refundable, and, most importantly, how to claim it.
How Does the Electric Car Tax Credit Work?
The electric car tax credit is offered to taxpayers who purchase qualifying electric or plug-in hybrid vehicles. It lowers your tax liability by a certain amount.
The EV credit has been adjusted by the Inflation Reduction Act for 2023-2032, allowing a maximum credit of $7,500 for new EVs and up to $4,000 or 30% of the sale price for used ones. Only one credit per vehicle can be claimed.
To be eligible for the latest EV tax credit, your income should not exceed specific thresholds, and the vehicle you plan to buy must meet particular IRS specifications, such as price limits and manufacturing guidelines.
The alterations to the clean vehicle tax credit, outlined below, became effective in January 2023, except for the critical mineral and battery regulations, which were implemented on April 18, 2023. To better understand how does the electric car tax credit work, let’s dive into the next segment.
Inclusion of Used EVs
One major point of contention with the previous version of the EV tax credit was its exclusion of used cars. This issue has been addressed. Starting in 2023, qualified purchases of used EVs can entitle taxpayers to a credit of up to $4,000, capped at 30% of the vehicle’s purchase price.
- The used car must be a plug-in electric vehicle or fuel cell vehicle with a minimum of 7 kilowatt hours of battery capacity.
- It only applies to the initial transfer of a vehicle.
- The car’s purchase price must not exceed $25,000.
- The vehicle model must be at least two years old.
- The vehicle’s weight must not exceed 14,000 pounds.
- The credit can be claimed once every three years.
As of 2023, in order to be eligible for the credit, vans, SUVs, and pickup trucks must have a manufacturer’s suggested retail price (MSRP) of $80,000 or less. Sedans and passenger cars are limited to $55,000, while for used vehicles, the cap is set at $25,000.
According to the IRS, the MSRP for new vehicles is the basic retail price from the manufacturer, including the retail cost of any accessory or optional equipment physically present on the car at the time of delivery to the dealer. It’s important to note that, for the purpose of claiming the credit, the MSRP does not encompass taxes and additional fees imposed by the dealer.
In addition to placing restrictions on vehicle prices, the fresh credit also imposes boundaries on the modified adjusted gross income that taxpayers can earn to be eligible.
According to the IRS, you can utilize your MAGI from either the year of the car’s delivery or the preceding year. This implies that if your income surpassed the threshold in one year but fell below the limit in the other year, you might still qualify for the credit.
Let’s look at the EV tax credit income limit in 2023 for new and used cars:
New Cars (Bought in 2023 or after)
|Tax-filing status||Modified Adjusted Gross Income|
|Heads of Households||$225,000|
|Married Couples Filing Jointly||$300,000|
|All Other Filers||$150,000|
|Tax-filing status||Modified Adjusted Gross Income|
|Heads of Households||$112,500|
|Married Couples Filing Jointly or a surviving spouse||$150,000|
|All Other Filers||$75,000|
If your income disqualifies you from eligibility, you can explore various tax strategies to reduce your income during the year. These might include maximizing your 401(k) contributions or contributing to an HSA or FSA. This gave you an overview of the EV tax credit income limit in 2023.
Also Read: What is the Federal Solar Tax Credit?
Final Assembly Requirements
To qualify for the latest credit, vehicles must undergo final assembly in North America. You can verify a car’s final assembly details by consulting the VIN (vehicle identification number) database of the National Highway Traffic Safety Administration. This explains how does the electric car tax credit work. Now, let’s find out if the EV tax credit is refundable or not.
Is the EV Tax Credit Refundable?
After learning how the electric car tax credit work, let’s see if the EV tax credit is refundable. Well, the EV tax credit is nonrefundable, meaning you cannot receive more in credit than you owe in taxes. Additionally, any excess credit cannot be carried over to future tax years. Now, let’s learn how to claim the $7500 EV tax credit.
How to Claim $ 7500 EV Tax Credit
As we are discussing how the electric car tax credit works, let’s take a look at how to claim the $7,500 EV tax credit:
1. Confirm Your Eligibility
You may qualify for a credit of up to $7,500 under Internal Revenue Code Section 30D if you purchase a new, qualified plug-in EV or fuel cell electric vehicle.
2. Gather Required Documents
Before leaving the dealership with a new EV, ensure you have the necessary documents needed to claim the credit on your taxes. These should include specific details about the vehicle, such as the name and taxpayer identification number (TIN) of the seller, your own name and TIN, and date of sale and sales price.
You should also have the verification of the maximum tax credit eligible for the vehicle, the vehicle’s VIN and battery capacity, verification that you are the original user of the vehicle, and a statement of declaration from the seller under penalty of perjury.
3. Submit Form 8936
Form 8936 is the official IRS form used to claim the qualified plug-in electric drive motor vehicle credit or the new clean vehicle credit. If you bought a qualifying plug-in EV or clean vehicle within the designated timeframes (either after December 31, 2009, through December 31, 2022, or January 1, 2023, through December 31, 2032), you can claim the respective credit by completing Form 8936 and attaching it to your Form 1040 when filing your tax return.
4. Redeem the Credit
You can claim this credit on your federal income tax return by filing the IRS Form 8936. Starting in January 2024, the credit will be available as cash on the day of purchase, irrespective of the size of a customer’s tax bill. After understanding how the electric car tax credit works and how to claim the $ 7500 EV tax credit, let’s unravel the difference between the IRS EV tax credit 2023 vs 2024.
Also See: Can You Claim Solar Tax Credit Twice?
IRS EV Tax Credit 2023 Vs 2024
You are already aware of how the electric car tax credit works, let’s check out the differences between the 2023 vs 2024 IRS EV tax credits. The 2023 IRS EV tax credit essentially works through a tax return process where eligible individuals can claim the credit the year after the vehicle purchase.
According to the press release from the U.S. Department of the Treasury, the changes introduced under the Inflation Reduction Act starting in 2024 will significantly modify the current EV credit process, allowing consumers to transfer the credit to the dealer at the time of sale.
- Starting from January 1, 2024, buyers can transfer the new clean vehicle credit of up to $7,500 and the previously owned clean vehicle credit of up to $4,000 to the dealer. This immediate transfer at the point of sale lowers the vehicle’s purchase price for the buyer.
- The transfer is facilitated through the dealer’s registration with the IRS Energy Credits Online system.
- The dealer submits time of sale reports, confirming the vehicle’s eligibility for the credit, and then receives an advance payment for the value of the credit within 72 hours.
- Buyers are eligible to claim or transfer the credit if they affirm their eligibility based on their income in the previous year or their expected income for the current year.
- However, if they exceed the applicable modified adjusted gross income limitation, they must repay the full value of the transferred tax credit to the IRS when filing their taxes.
This sums up the between the IRS EV tax credit 2023 vs 2024.
Additionally, go through our blog – Electric Scooter UK Law Change 2023
In conclusion, effectively harnessing the benefits of the tax credit not only eases the financial burden associated with electric vehicle purchases but also fosters environmental responsibility. By leveraging this incentive, individuals can actively contribute to global efforts to reduce carbon footprints and build a cleaner, greener environment for future generations.
Source: Clean Vehicle and Energy Credits