Written by David Neuman, JD, Tax and Legal Manager
More and more car buyers are purchasing electric vehicles. Approximately 282,000 EV’s were sold in the U.S. during the fourth quarter of 2022, up 51% from a year earlier. Individuals who purchase new electric vehicles may be eligible for a tax credit up to $7,500 and used electric car owners may qualify for up to $4,000 in tax credits starting in 2023. The EV tax credit was extended and revised under the Inflation Reduction Act of 2022, which means that individuals purchasing electric vehicles through 2032 may be eligible for these benefits. However, there may be some hiccups for consumers as the recent changes roll out.
The new rules issued by the Treasury Department aim to make the U.S. less reliant on batteries and critical minerals shipped from China. As of April 18, 2023, electric vehicles subject to the credit have to meet new manufacturing standards requiring batteries and critical minerals to be at least partially sourced from the U.S. While these latest rules may complicate the choice of vehicle, the overall program is expected to result in more people using the benefit over time.
The electric vehicle tax credit, or the EV credit, is a nonrefundable tax credit offered to taxpayers who purchase qualifying plug-in electric or “clean” vehicles. Nonrefundable tax credits lower your tax bill by the corresponding credit amount. If you do not have any tax liability, you will not get the credit back as a refund.
For tax year 2022, the EV tax credit ranges from $2,500 to $7,500, and eligibility depends on the vehicle’s weight, how many cars the manufacturer has sold and whether you own the car. The Inflation Reduction Act, or IRA, made several changes that, for the most part, affect vehicles purchased from 2023 through 2032. Among the new elements added are manufacturing requirements, income thresholds and expanded eligibility for certain types of cars.
The most significant change to the EV tax credit is its extension. The credit was revived for another nine-year period, allowing taxpayers with eligible cars to take advantage of it from 2023 to 2032. Taxpayers can only claim one credit per vehicle. The IRA also made several adjustments to manufacturing limits that previously hampered eligibility for the credit if you bought a car from a manufacturer, such as Tesla, that had sold more than 200,000 qualifying vehicles. Beginning in 2023, manufacturing caps will be lifted. Also, one of the most contentious issues with the older version of the EV tax credit was its exclusion of used cars. Beginning in 2023, qualifying used EV purchases can fetch taxpayers a credit of up to $4,000, limited to 30% of the car’s purchase price.
The IRA also institutes price caps for eligible vehicles. Beginning in 2023, vans, SUVs and pickup trucks must have an MSRP of $80,000 and under to qualify. Other vehicles, such as sedans and passenger cars, are capped at $55,000. For used vehicles, the price cap drops to $25,000. Along with price caps on cars, the new credit also sets limits on the modified adjusted gross income that taxpayers can make in order to qualify. The program has income caps of $300,000 for married couples and $225,000 for heads of households and $150,000 for all others. Per the IRS, you can use your MAGI from either the year the car is delivered, or the year prior to delivery. Corporations and other entities that don’t report adjusted gross income are also eligible for the credit.
If you are considering purchasing a new or used EV, please reach out to your LMC contact for further information regarding tax credit eligibility and requirements.