Among the many items in the newly signed Inflation Reduction Act of 2022 are additional federal tax credits for certain electric vehicle (EV) purchases. Federal income tax credits always reduce a taxpayer’s total tax liability and are more beneficial than income tax deductions.
The credits available under the Inflation Reduction Act offer up to a $7,500 credit for new purchases, but there are conditions of the tax credit that could make things a bit complicated. Here’s a brief summary of the extended EV tax credits under this legislation:
- The $7,500 tax credit only applies to new EV purchases. For used EV purchases, the credit is $4,000 or 30% of the purchase price, whichever is less.
- Generally, taxpayers claim the credit on the taxpayer’s federal income tax return in the year the vehicle is purchased. But in 2024, you can elect to transfer the credit to the auto dealer when you buy the EV, which will reduce the purchase price.
How the Electric Vehicle Tax Credit Works for New EV Purchases
There are a few stipulations to your new EV purchase qualifying for the $7,500 tax credit. First, the credit only applies to a new electric car priced at $55,000 or less. If you opt for a new electric truck, SUV, or van, the credit only applies for vehicles priced at $80,000 or less. At current Tesla prices, only it’s Model 3 sedan and Model Y SUV qualify for the credit.
There are also some income conditions. The $7,500 credit only applies to taxpayers with an adjusted gross income of:
- $150,000 if filing individually.
- $225,000 if filing as head of household.
- $300,000 if filing jointly.
Finally, there are some conditions within the tax credit aimed at incentivizing the purchase of EVs made in the US and North America. In addition to meeting the requirements above, to qualify for the new EV credit, your new vehicle purchase must meet the following conditions:
- Your EV must have been assembled in North America.
- If your EV is built by a U.S.-based manufacturer, the manufacturer must source its materials from countries with free trade agreements with the United States.
- Your EV’s manufacturer can’t source any batteries from China beginning in 2024 and raw minerals from China beginning in 2025.
How the Electric Vehicle Tax Credit Works for Used EV Purchases
The electric vehicle tax credit applies to used electric car purchases beginning in 2023 and only for used vehicles priced at $25,000 or less.
In addition, the used EV credit only applies to taxpayers with an adjusted gross income of:
- $75,000 if filing individually.
- $112,500 if filing as head of household.
- $150,000 if filing jointly.
How Do I Know if I Qualify for the Electric Vehicle Tax Credit?
The conditions and qualifications to be eligible for the electric vehicle tax credit can be a bit confusing. But, the Department of Energy and the National Highway Traffic Safety Administration have developed a few helpful resources to help you determine if your purchase qualifies. Buyers and dealers can confirm a vehicle applies using a simple two-step process:
- Check if your 2022 or 2023 EV model is on this list from the Department of Energy.
- Confirm your vehicle qualifies by using this VIN tool from the National Highway Traffic Safety Administration.
In the coming weeks and months, IRS and the Treasury Department plan on posting information on the existing EV credits and new credits, including further eligibility rules. Those updates can be found on the IRS website.