Everything You Need to Know About the Electric Vehicle Tax Credit
Drivers who are hoping to go green might want to perk up. You may be eligible for the electric vehicle (EV) tax credit. It’s a nice perk that could directly reduce your tax bill by as much as $7,500 in 2023. Certain restrictions apply, but it’s definitely worth looking into if you’re in the market for an electric vehicle.
The EV tax credit has been around for a while, but the Inflation Reduction Act (signed into law on August 16, 2022) is making some key changes. Here’s what it all means, plus some tips for drivers who purchase an EV in 2023. Let’s take a deep dive into the electric vehicle tax credit, shall we?
How the electric vehicle tax credit came to be
Tax credits for electric vehicles are nothing new. It began with the Energy Improvement and Extension Act of 2008. The idea was to motivate more drivers to switch to electric cars (which are better for the environment) and create more demand in the market.
Prior to the Inflation Reduction Act of 2022, electric vehicle owners could claim a credit worth anywhere from $2,500 to $7,500. (Their car’s battery capacity and weight determined how much.) But once a manufacturer sold 200,000 qualifying vehicles, credits were reduced before being phased out altogether — bad news for folks who had their eye on a popular model, like a Tesla. Used car owners were also disqualified.
The Inflation Reduction Act is supercharging the EV tax credit and making some much-needed expansions. Most changes aren’t taking effect until 2023, but there is one thing worth mentioning. For folks who purchase an EV after August 16, 2022, it’s required that the vehicle’s final assembly be in North America. If not, no tax credit for you. Let’s say you’re in a gray area where you entered into a contract to buy an EV before that date, but your car isn’t arriving until later. The IRS says the new assembly requirement won’t apply in these cases.
How new electric vehicle owners can get the credit in 2023
Okay, let’s get into the nuts and bolts of the EV tax credit. It’s broken down into two even parts, each worth up to $3,750. Both have to do with how the car battery is made.
Some portion of the vehicle’s battery must be assembled or manufactured in North America. The higher the percentage, the higher the credit.
EV car batteries rely on critical minerals to operate. A certain percentage of these minerals must be extracted or processed within the United States (or a country the U.S. has a free-trade agreement with). The higher the percentage, the higher the credit. Beginning in 2024, the vehicle’s battery components cannot be manufactured or assembled by a foreign entity of concern. That includes China and Russia. Starting in 2025, if an EV’s battery contains critical minerals that were extracted, processed, or recycled from a foreign entity of concern, that car will be ineligible for the tax credit.
If you’re looking at an EV that meets these requirements, you’re off to a good start. Just be aware of price caps starting in 2023. The MSRP for pickup trucks, vans and SUVs cannot exceed $80,000. All others top off at $55,000. Another notable change is the introduction of income limits. Here’s how it shakes out, depending on your tax-filing status:
Single: $150,000
Married, filing jointly: $300,000
Head of household: $225,000
On the upside, taxpayers can say goodbye to manufacturing limits. As of 2023, it won’t matter if an EV manufacturer sells 200,000 models or more. Eligible cars will still qualify. That should open the tax credit up to a lot more people.
An EV tax credit of up to $4,000 will also be available for used cars bought through a dealer. The vehicle must be at least two years old, and the purchase price can’t exceed $25,000. The used EV tax credit can be used once during the car’s lifetime. So if it gets sold to a new owner down the line, that person can’t claim the credit. One other thing: you can only claim the used EV tax credit once every three years (instead of every year). Income caps are different for used EVs too:
Single: $75,000
Married, filing jointly: $150,000
Head of household: $112,500
Which cars are on the list?
Now that we know the nitty-gritty details, which electric vehicle models actually meet the criteria for the EV tax credit? The U.S. Department of Energy has this list of vehicles that may meet the final assembly requirement, but you’ll want to double-check before purchasing. Find My Electric, an EV marketplace, put together this list of models that may qualify for the tax credit in 2023:
Chevrolet Blazer EV
Chevrolet Bolt
Chevrolet Bolt EUV
Some trim levels of the Chevrolet Silverado
Some trim levels of the Ford F-150 Lightning
Ford Mustang Mach-E
Nissan Leaf
Some versions of the Tesla Model 3
Tennessee-assembled models of the Volkswagen ID.4
The Cadillac Lyriq and some versions of the Tesla Model Y might also make the list if they meet the new criteria. This isn’t an exhaustive list, and it’s not set in stone. Treat it like a potential jumping-off point when researching your next electric vehicle.
Tax credits can be confusing, but this one rewards environmentally-minded taxpayers. Reach out if you want someone to walk you through it.