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Tax credits for electric vehicles (EVs) aren’t new, but they’re becoming more relevant and of interest to more people with the rise in adoption of EVs in the US. Thanks to recent legislation by Congress and President Biden related to tax credits and other provisions, some of the stumbling blocks that have held back EVs—such as price, driving range, battery charging time, and access to charging stations—are starting to fall away. The new legislation commits support and a lot of money to expanding the EV market, which is good news for buyers.
According to Bloomberg, the US has reached a tipping point in EV adoption. For the first six months of 2022, cars powered solely by electricity represented 5% of all new cars sold(Opens in a new window). Throw in plug-in hybrids (PHEVs), and we may reach 10% soon if we haven’t already. (Here’s our explainer on the difference between EVs, HEVs, and PHEVs.)
Though related tax benefits have been included in earlier legislation, the Inflation Reduction Act of 2022, a slimmed-down version of the Build Back Better Act, was signed into law by President Biden in 2022. Some legislators call it the most significant piece of climate change legislation ever passed. And it continues to support tax credits for EVs, albeit with some proposed new restrictions announced on March 31, 2023, that may cut the original $7,500 tax credit in half.
Is the EV Tax Credit Still Available?
Income tax credits for EVs came into the picture in 2008 and remain in force today. The IRS provides a credit for qualified EVs or PHEVs acquired after December 31, 2009 (here is the list of eligible vehicles(Opens in a new window) and their corresponding tax credits). To claim the credit, report an eligible EV purchase on IRS Form 8936 when you fill out your tax return. The credits range from $2,500 to $7,500, depending on the battery’s capacity and where the critical mineral and battery components are mined and manufactured (more on that later).
The credit is nonrefundable, meaning you can only claim as much as you owe in federal income taxes for the year you claim the credit (which must be the year you purchase and start using the vehicle). For example, if you only owe $6,000 in taxes, the most you can get as a credit is $6,000, even if your vehicle is eligible for the full $7,500. The credit doesn’t roll over, either. Another caveat: The IRS always has the right to reject a given credit or reduce it.
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Can You Still Get the Full $7,500 Tax Credit for an EV?
As of March 31, 2023, you may still be eligible to get the full $7,500 tax credit, as you were before. Initially, the IRS and the Treasury Department had proposed an additional set of rules requiring critical mineral mining and battery component manufacturing in specific countries outside the US. It recently finalized that proposal in a Notice of Proposed Rulemaking.
The vehicle you purchase must meet sourcing requirements for both the critical minerals and battery components contained in the vehicle. If it only meets one of the two requirements, you’ll still be eligible for a $3,750 credit.
To meet the critical mineral requirement ($3,750) of the full tax credit, a percentage of the vehicle’s battery materials, like lithium and nickel, needs to be processed or extracted either in the US or in a country with which the US has a free trade agreement(Opens in a new window). In 2023, that percentage of battery materials is 40%. It goes up by 10% every year, topping out at 80% in 2027.
To qualify for the other half (an additional $3,750) of the credit, the vehicle purchased would be required to have the majority of its battery components made in the US, Canada, or Mexico. In 2023, the percentage is set at 50%, increasing to 100% by 2029. This assumes that the vehicle meets all of the basic requirements(Opens in a new window) for the tax credit.
The problem is that most of the world’s mineral refining and battery component production is done in China and other countries with which the US does not have free trade agreements. And there are a lot of political(Opens in a new window) and environmental risks(Opens in a new window) to ramping up those activities in the US. Some legislators, especially Senator Joe Manchin, wanted the US to expand its mineral mining and not depend on foreign countries for raw battery materials.
Congress has offered a few proposed solutions to the issue of where batteries and their parts for electric vehicles come from. The IIJA contains provisions (money) that would address the supply chain issues related to lithium-ion batteries. Further, it calls for identifying, producing, recycling, and reusing critical minerals. And it supports manufacturers who want to build facilities for energy production in communities where coal mines or coal power plants have closed.
Is There a Tax Credit for Fuel Cell Vehicles?
With the Inflation Reduction Act, the name of the EV tax credit will be changed to the “clean vehicle credit.” This means that fuel cell vehicles (FCVs) should qualify, as long as they are assembled in North America. FCVs are considered zero-emission vehicles because they utilize oxygen from the air along with compressed hydrogen.
Fuel cells have been used in various vehicles, some for commercial applications, like forklifts, although Hyundai, Toyota, and Honda produce passenger vehicles using this technology, too. However, a dearth of hydrogen fueling stations and other logistical problems may prevent FCVs from fully taking hold as personal vehicles. The credit for commercial fuel cell vehicles maxes out at 30% of the cost or $40,000, whichever is less and will remain in place until 2032.
Can You Get the EV Tax Credit for a Used or Leased Car?
If you purchase a used EV, there’s a different credit. You could get up to a $4,000 credit or 30% of the sale price, whichever is less. And the amount of the credit phases out based on your adjusted gross income (AGI). If your AGI is more than $150,000 for a couple filing jointly, $112.500 for head or household, or $75,000 for all others, then the amount of tax credit you get is reduced. The credit is slated to end in 2032.
If you lease an EV from a dealership, the credit goes to the dealership, although the dealership may in turn cut you a break so you can take at least partial advantage of it. Leased vehicles might be eligible for a state credit, however, depending on where you live and register the car. California, Illinois, and New York all have credits, as I discuss a little later.
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What Other Changes Come With the Inflation Reduction Act?
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Full tax credit eligibility for more EVs. In the old system, the full EV tax credit wasn’t available if you bought a car from a manufacturer that had sold more than 200,000 EVs. But that changed with the Inflation Reduction Act. In other words, you’re now eligible for the full $7,500 if you buy a Tesla or General Motors vehicle, even though they wouldn’t have qualified previously.
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Higher income limits to receive the full tax credit. EV tax credits start to phase out at AGIs of $300,000 (married filing jointly), $225,000 (head of household), and $150,000 (all others).
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Price limits. You can’t get the credit for buying a sedan that costs more than $55,000 or an SUV (“light truck”) or pickup truck that costs more than $80,000.
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Commercial EVs. As with fuel cell vehicles, the credit for commercial-use EVs could be as much as 30% of the vehicle’s cost or $40,000.
Are There State Tax Credits for Electric Vehicles?
Yes. Hundreds of them. Retailers in most states offer a combination of tax credits, rebates, and reduced vehicle taxes or registration fees. The Department of Energy maintains a list of them by state(Opens in a new window). Check out this list for more current additions(Opens in a new window) as well as new state laws and regulations. But here are some examples.
California EV Tax Credits
California offers the Electric Vehicle Program. It’s a point-of-sale rebate of up to $750 for the purchase or lease of a new EV or PHEV through the Clean Fuel Reward Program. To qualify, the vehicle must have a minimum battery capacity of 5 kilowatt-hours and be purchased from a participating retailer.
The Clean Vehicle Rebate Project offers up to $4,500 for FCEVs, $2,000 for EVs, $1,000 for PHEVs, and $750 for zero-emission motorcycles to individuals who buy or lease. Eligibility is based partly on annual gross income, and the rebates are first come, first served.
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Colorado EV Tax Credits
If you buy or convert a light-duty EV in Colorado, you may be eligible for a $2,500 tax credit ($1,500 for leasing) in 2022. Credits are also available for light-duty, medium-duty, and heavy-duty electric trucks, ranging from $3,500 to $10,000.
Illinois EV Tax Credits
The Illinois Environmental Protection Agency offers rebates to residents who purchase or lease a new or pre-owned EV. The rebate is up to $4,000 through June 30, 2026.
New York EV Tax Credits
New York’s Electric Vehicle Rebate Program provides rebates of up to $2,000 for the purchase or lease of a new eligible EV.
EV Tax Credits in Other States
Connecticut, Massachusetts, New Jersey, and other states also offer significant rebates or tax credits. But read all the eligibility requirements before buying a new EV, PHEV, or FCEV.
Is the Future Electric?
Car and Driver published a guide of all the EVs(Opens in a new window) expected to be available within the next five years that are in various stages of development, from concept to production. Some may never be made. Even if they’re built, how quickly will consumers buy them? Many futurists envision charging stations will be as ubiquitous as Speedways and gas-powered vehicles as extinct as the ancient life forms that morphed into their fuel. Their predictions for exactly when this might happen are less certain.
The Volvo S60 Recharge PHEV is eligible for the full $7,500 tax credit.
(Credit: Volvo)
There are plenty of reasons an all-electric world would be beneficial for the planet and for the health of its inhabitants. According to a recent Pew Research Center survey(Opens in a new window), that’s the number-one reason Americans would consider buying an EV.
Oddly, though the majority of survey respondents supported the use of incentives like tax credits to encourage the use of EVs and PHEVs, fewer than half (42%) “would be very or somewhat likely to seriously consider purchasing an electric vehicle the next time they’re looking for a new car or truck.”
For more advice on electric vehicles, see our list of the best electric and hybrid cars. For more on taxes in general, we have a full roundup of the best online tax preparation services.
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