Electric, plug-in hybrid, and fuel cell electric vehicles purchased new in 2023 or after may be eligible for a federal income tax credit of up to $7,500. The credit availability will depend on several factors, including the vehicle’s Manufacturer Suggested Retail Price (MSRP), final assembly location, battery component and/or critical minerals sourcing, and your modified adjusted gross income (AGI).
Starting January 1, 2024, Clean Vehicle Tax Credits must be initiated and approved at the time of purchase. Buyers should receive a copy of the IRS confirmation that the dealer has submitted a “time-of-sale” report. To qualify for the credit, the vehicle must be new, meaning it has never been purchased, registered, titled, or used in any capacity.
Qualification Criteria
The credit is available to individuals and their businesses. To qualify, you must buy the vehicle for your use, not for resale, use it primarily in the U.S., and your MAGI must be $300,000 or less for joint filers and surviving spouses, $225,000 or less for head-of-household filers, or $150,000 or less for other filers.
You can use your MAGI from the year you take delivery of the vehicle or the year before, whichever is less. You can claim the credit if your MAGI is below the threshold in one of the two years. The credit is nonrefundable, so you can’t get back more on the credit than you owe in taxes or apply any excess credit to future tax years.
Qualified Vehicles
To qualify, a vehicle must have a battery capacity of at least 7 kilowatt hours, a gross vehicle weight rating of less than 14,000 pounds, and be made by a qualified manufacturer. Fuel cell vehicles need not be made by a qualified manufacturer to be eligible.
Final Assembly Requirement
The vehicle must be assembled in North America. Taxpayers can utilize the National Highway Traffic Safety Administration (NHTSA) VIN Decoder tool to confirm whether a specific vehicle meets this requirement. This tool offers essential details, including the vehicle’s manufacturing plant location.
Critical Minerals and Battery Component Requirements
For vehicles placed in service (delivered to the consumer) on or after April 18, 2023, the credit amount will depend on the vehicle meeting the critical minerals sourcing and/or battery components sourcing requirements. A vehicle that meets both sourcing requirements may qualify for the full $7,500 credit, while one that meets only one requirement may receive a $3,750 credit.
Beginning on January 1, 2024, a vehicle is ineligible for a tax credit if any of the battery’s components were sourced from a “foreign entity of concern,” which includes China, Iran, North Korea, and Russia. As of January 1, 2025, this exclusion will also cover critical battery minerals.
Transfer of Credits
Beginning in 2024, taxpayers can transfer the EV tax credit to a qualified dealer at the time of purchase, allowing them to convert the credit into an immediate discount on the vehicle. To facilitate this, the dealer must register with IRS Energy Credits Online and provide a “time of sale report” for the EV.
MSRP Requirement
The MSRP of a vehicle can’t exceed $80,000 for vans, sport utility vehicles, and pickup trucks or $55,000 for other vehicles. The MSRP does not include destination charges, the cost of optional items added by the dealer, taxes and fees, manufacturer/dealer incentives, or trade-ins.
Tax Credits for Leased Vehicles
Under IRS regulations, leased EVs or plug-in hybrid electric vehicles (PHEVs) from dealerships are classified as “commercial vehicles.” Therefore, the leasing company receives the full $7,500 tax credit. Leased EVs and PHEVs are exempt from the earlier major restrictions, including limitations on final assembly, battery sourcing, and vehicle pricing. Since no purchase occurs in a lease, buyer income caps also do not apply.
Tax Credits for Used EVs
The tax credit for used EVs is capped at either 30% of the vehicle’s value or $4,000, whichever is less. As previously mentioned, no assembly or battery-sourcing requirements exist for used EVs and PHEVs. The rules for used EVs went into effect on January 1, 2023, and include:
- Used vehicles must have a sale price of $25,000 or less to qualify.
- Buyer MAGI limits are $150,000 for married couples filing jointly or a surviving spouse, $112,500 for heads of households, and $75,000 for individual filers.
- The vehicle must be at least two model years older than the purchase year.
- The used EV tax credit can be claimed only once in the vehicle’s lifetime.
- Once a buyer claims the federal used EV credit, they must wait three years before being eligible for another.
- The vehicle must be for personal use and “not for resale.”
- The vehicle must be purchased through a dealer.
- Only individuals can claim the used EV tax credit; businesses are excluded.
State and/or local tax incentives may also apply. You can learn more about the credits available in your state here.
We are happy to answer your questions about EV and other tax credits. For additional information, contact your Stephano Slack tax manager/partner at 610-687-1600 or [email protected].
Author Robert Radzinski, CPA, Manager, manages tax compliance for businesses and high net-worth individuals. Rob can be contacted at 610-687-1600 or [email protected].
Recent Comments