EV Tax Credit 2023: How It Works
Electric vehicles (EVs) can spell big savings in gas, but did you know they can also give you a break on this year’s taxes? The EV tax credit is a great way to ease your tax liability this year. The IRS refers to this credit as a clean vehicle tax credit, and it can potentially save you thousands on your income tax. Here’s everything you need to know.
- For vehicles placed in service from 01/01/2023 to 04/17/2023, the maximum credit amount was $7,000. Starting 04/18/2023, for cars put in service on or after that date, the EV tax credit allows you to claim up to $7,500 in nonrefundable tax credit.
- You must be below certain income thresholds to claim the EV credit.
- Eligible EVs must meet requirements for battery manufacturing and mineral sourcing.
- Certain makes and models are eligible for half or all of the EV credit.
- Accounting software helps simplify tax credits like the EV tax credit.
Table of Contents
- What is a Tax Credit?
- What Is the EV Tax Credit?
- How Does the EV Tax Credit Work?
- EV Tax Credit Income Limit
- Calculating the EV Tax Credit
- Which Electric Vehicles are Eligible for a Tax Credit?
- How to Claim the EV Tax Credit
- What If You Lease an EV?
- Streamline Your Tax Preparation With FreshBooks
- Frequently Asked Questions
What Is a Tax Credit?
The IRS defines a tax credit as a dollar-for-dollar amount that taxpayers can claim to reduce the income tax they owe. There are two kinds of tax credits: refundable and nonrefundable. With a refundable credit, any amount left over after your tax bill is paid is returned to you as a refund. Nonrefundable credits, on the other hand, only pay down your tax liability. Any remaining amount after your tax is paid in full is not refunded.
What Is the Electric Vehicle Tax Credit?
The electric vehicle tax credit, or EV credit, is a type of nonrefundable, federal tax credit meant to incentivize purchases of new plug-in electric vehicles (EVs), hybrid vehicles, and fuel cell electric vehicles (FCVs).
The EV credit was recently revamped due to the recent Inflation Reduction Act. From 2023 to 2032, taxpayers can now claim up to $7,500 in tax credit for newly purchased EVs, and up to $4,000 in credit for the purchase of a used EV. Currently, you can only claim this credit on a single vehicle.
How Does The EV Tax Credit Work?
There are a few key specifications to understand about qualifying for this type of federal tax credit. Firstly, your income must fall below certain thresholds in order to be eligible to claim EV tax credits. The vehicle you purchase is also subject to certain regulations—namely, price caps and specific manufacturing rules.
As of the beginning of 2023, used EVs now also qualify for this clean vehicle credit, though these are subject to even more IRS regulations that must be met if you want to claim the credit on this year’s taxes. These include:
- The vehicle must be electric or fuel cell-powered with a battery capacity of at least 7 kilowatt hours
- The credit can only be claimed on the first transfer of a used EV
- The vehicle must be purchased for $25,000 or less
- The specific model must be 2 years old or older
- The claimed vehicle must have a gross vehicle weight rating of less than 14,000lbs
- Taxpayers can only claim this credit on used EVs once every 3 years
Claiming deductions doesn’t need to be a time-consuming, confusing process. FreshBooks account software helps with every aspect of your tax preparation, ensuring you take advantage of every deduction and tax break available to you.
EV Tax Credit Income Limit
In order to qualify for the clean vehicle credit, your modified adjusted gross income (AGI) must be below a certain threshold. These thresholds vary for credits claimed on new and used cars, so be sure to consider these limits when getting into the market for an EV or fuel-cell electric vehicle.
Income Limits to Claim the EV Credit for a New Car
|Tax Filing Status||Modified AGI|
|Head of household||$225,000|
|Married, filing jointly||$300,000|
|Married, filing separately||$150,000|
Income Limits to Claim the EV Credit for a Used Car
|Tax Filing Status||Modified AGI|
|Head of household||$112,500|
|Married, filing jointly||$150,000|
|Married, filing separately||$75,000|
Calculating the Electric Vehicle Tax Credit
The EV credit consists of 2 parts: battery and critical mineral sourcing requirements. Combined, these 2 parts make up $7,500 in potential tax credits. However, it’s possible to qualify for one and not the other, which would mean you can get a credit of up to $3,750 instead. If your EV was placed into service on or after April 18th, 2023, it’s subject to the following requirements if you want to claim the credit:
To incentivize the North American production of batteries, this requirement dictates how much of the battery must be assembled or manufactured in North America in order to claim 50% of the EV credit:
|Tax Year||Percentage Threshold of Battery Assembled/Manufactured in North America|
|2029 – 2032||100%|
Critical Minerals Sourcing
If you want to claim the remaining $3,750 of EV tax credits, certain requirements regarding the sourcing of critical minerals used in battery production must be met. These percentage thresholds refer to how much of these minerals have been extracted or processed either within the US or within a country that has a free-trade agreement with the US.
|Tax Year||Percentage Threshold of Critical Minerals Extracted/Processed in US or Free-Trade Countries|
|2027 – 2032||80%|
Which Electric Vehicles are Eligible for a Tax Credit?
Aside from battery and sourcing requirements, it’s important to know which specific makes and models of electric vehicles qualify for the EV credit, as not all of them do. Here are the eligible vehicles for an EV credit:
|Car Make/Model||MSRP Limit||Tax Credit Amount|
|X5 xDrive50e (2024)||$80,000||$3,750|
Bolt EUV (2022-2023)
|Pacifica PHEV (2022-2024)||$80,000||$7,500|
|F-150 Lightning (2022-2023)||$80,000||$7,500|
|Mustang Mach-E (2022-2023)||$80,000||$3,750|
|Grand Cherokee PHEV 4xe (2022-2024)||$80,000||$3,750|
|Wrangler PHEV 4xe (2022-2024)||$80,000||$3,750|
|Aviator Grand Touring (2022-2023)||$80,000||$7,500|
|Corsair Grand Touring (2022-2023)||$80,000||$3,750|
|R1S (2022-2023)R1T (2022-2023)||$80,000||$3,750|
|Model 3 Standard Range RWD (2022-2023)|
Model 3 Performance (2022-2023)
|Model Y Performance (2022-2023)|
Model Y AWD (2022-2023)
Model Y Long Range AWD (2022-2023)
|Model 3 Long Range AWD (2023)||$55,000||$7,500|
|ID.4 Pro (2023)|
ID.4 Pro S (2023)
ID.4 Pro S Plus (2023)
ID.4 AWD Pro (2023)
ID.4 AWD Pro S (2023)
ID.4 AWD Pros S Plus (2023)
ID.4 S (2023)
ID.4 Standard (2023)
How To Claim Electric Vehicle Tax Credit
Claiming the EV credit is a fairly simple process. Just file Form 8936 along with your usual Form 1040. Since it’s a nonrefundable credit, it will simply be deducted from whatever you owe in taxes. However, it won’t be returned to you in a refund if it exceeds your tax bill.
One thing to note is that you can only claim the credit in the year that the EV was delivered to you, not the year in which you bought it. So if you buy the car in 2023, but don’t receive it until the following year, you’ll need to wait until you file 2024’s taxes before you can claim the credit.
What If You Lease An EV?
You cannot claim EV tax credits if you lease your EV, but it may still provide you with some indirect savings via the auto dealer you use. This is because dealers can claim a commercial vehicle credit on a wide variety of electric cars that they lease out. Theoretically, these savings are passed down to customers. While dealers may not volunteer these savings, it can be a useful piece of knowledge during negotiations.
Streamline Your Tax Preparation with Freshbooks
As you can see, the federal EV tax credit is an invaluable way to reduce your tax liability, particularly since many people are already making the switch to electric or hybrid vehicles. If you’re looking for a faster way to calculate these sorts of deductions and make tax time a breeze, FreshBooks accounting software is here to help. Track and categorize expenses, retain important records, and file with ease with this all-inclusive, cloud-based tax prep solution. Try FreshBooks for free today.
FAQs About the EV Tax Credit
Still curious about the EV tax credit and how it works? Here are some answers to the top questions to learn from:
How to get the full $7,500 EV tax credit?
In order to claim all of the $7,500 EV credit, you must fall below the modified AGI threshold for your tax filing status. Your vehicle must also comply with percentage thresholds regarding battery manufacturing and assembly as well as the sourcing of critical minerals. These percentage thresholds are set to change in the following tax year, so double-check them before purchasing an EV.
Is the $7,500 EV tax credit refundable?
No, the federal EV tax credits are nonrefundable. This means they can be deducted from your taxes owed to the IRS, but any remaining amount won’t be refunded to you after you file.
How does the EV tax credit work if you don’t owe taxes?
If you don’t have any income tax liability (in other words, if you don’t owe anything in taxes this year), you won’t receive any benefit from claiming the nonrefundable electric vehicle tax credit. You don’t need to take this credit unless you owe taxes to the IRS this year.
Can you claim the EV tax credit for multiple electric vehicles?
No, you cannot claim federal tax credits for more than 1 EV per filer in a single tax year. The vehicle can only be claimed twice in its lifetime—once when it is purchased new (up to $7,500 in credit) and once when it is sold as used by a dealer (up to $4,000 in credit).
What documentation do I need to provide to claim the federal EV tax credit?
To claim the EV credit on your taxes, you’ll need to file IRS Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit (Including Qualified Two-Wheeled Plug-in Electric Vehicles) along with your regular tax return. Aside from that, you’ll just need to provide the relevant vehicle identification number (VIN).
About the author
Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .