Combined sales of battery electric vehicles (BEV), hybrid vehicles, and plug-in hybrid electric vehicles in the United States rose to 16.3% of total new light-duty vehicle (LDV) sales in 2023, up from 12.9% in 2022. Could EV tax credits be playing a role?
With the recent passage of the Inflation Reduction Act (IRA), the federal government has made significant changes to the EV tax credit program, impacting both new and used vehicle purchases. The IRA includes a wide range of tax incentives aimed at combating the effects of climate change, one of which is the expansion of the Qualified Plug-in Electric Drive Motor Vehicle Credit (IRC Section 30D), now known as the Clean Vehicle Credit. With this ten-year extension in federal tax credits, there’s never been a more incentivized time to buy an EV. But driving off in an electric vehicle doesn’t mean getting a deduction by default.
Understanding the EV tax credit
The EV tax credit has been extended for ten years as part of the IRA and offers substantial incentives for purchasing qualifying electric vehicles. However, it’s essential to note that not all EVs qualify for the credit, and there are specific criteria that taxpayers must meet to claim it.
Qualifying for the credit
The 2024 EV tax credit introduces several changes, including tighter restrictions on vehicle eligibility and enhanced requirements for battery and component sourcing. Notably, vehicles with components made in China or under Chinese government control are disqualified from the credit. Additionally, battery component percentages and final assembly requirements have been adjusted to promote domestic production.
To qualify for the EV tax credit, several factors come into play.
Vehicle eligibility
The price of the electric car or SUV must not exceed certain limits, with a maximum manufacturer’s suggested retail price (MSRP) of $55,000 for cars and $80,000 for SUVs. Additionally, vehicles must meet specific manufacturing requirements, including battery and critical mineral component percentages.
Income limitations
Your modified adjusted gross income (MAGI) must fall below certain thresholds, depending on your filing status. The income limits are:
- $150,000 for single filers
- $225,000 for heads of household
- $300,000 for married couples filing jointly
Battery and component requirements
Vehicles must meet battery production and component sourcing requirements to qualify for the full tax credit:
- The percentage of vehicle battery components that must be produced in North America increased from 50% to 60%
- Critical mineral components must be 50% domestically produced or extracted (up from 40%)
Final assembly
Vehicles must undergo final assembly in North America to be eligible for the credit.
While all of this is confusing to those of us who aren’t vehicle aficionados, information on which vehicles qualify can be found at the fueleconomy.gov website.
How the EV tax credit is calculated
The maximum EV tax credit available is $7,500, but it can be reduced based on various factors. The credit is comprised of two components:
- A base credit of up to $3,750 if the vehicle meets critical minerals requirements
- An additional $3,750 credit if the vehicle meets battery component requirements
How to claim the EV tax credit
You have two options for claiming the EV tax credit:
- You can file Form 8936 with your federal income tax return to claim the credit. This option reduces your tax liability but does not result in a refund if the credit exceeds your tax owed.
- Alternatively, you can transfer the credit to an eligible dealership at the point of sale to reduce the purchase price of the vehicle and provide immediate savings.
You may also be interested in: How to deduct expenses for business vehicle use
Other EV tax credit considerations
Beyond the eligibility criteria and claiming process, you should be aware of additional factors related to the EV tax credit.
Used vehicle credits
The credit for used EV purchases is worth 30% of the sale price, up to $4,000. However, specific requirements must be met, including vehicle age, purchase price, and income limitations.
Expiration date
The EV tax credits are set to expire on December 31, 2032, providing a window for you to take advantage of the incentives.
State incentives
Some states offer their own EV tax credits or incentives, which can further enhance your savings. It’s essential to research state-specific programs to maximize benefits.
Charging infrastructure
While not directly related to the tax credit, the availability of EV charging infrastructure is a crucial consideration for prospective EV owners. The expansion of charging networks can enhance the practicality and convenience of EV ownership.
Drive away (sustainably) with an EV tax credit
The 2024 EV tax credit offers significant opportunities for taxpayers to reduce their tax liability while contributing to sustainability efforts. However, navigating the complexities of the credit requires careful consideration of eligibility requirements and strategic planning. Get in touch with our advisors if you need help staying updated and optimizing your financial plan for legislative changes and the latest developments in tax incentives.