Key Updates to the Electric Vehicle Tax Credit: Essential Information

Electric vehicles (EVs) have rapidly gained traction in recent years, thanks in large part to financial incentives designed to encourage investment in this innovative technology. However, individuals considering an EV purchase should be aware of some significant policy updates that could influence their decision-making.

The Inflation Reduction Act, passed in 2022, brought sweeping changes to the tax credits available for EV buyers. Renamed the Clean Vehicle Credit, this updated program introduces notable adjustments effective in 2024. These include eliminating restrictions tied to a manufacturer’s sales volume, broadening eligibility to cover fuel cell electric vehicles, and offering substantial potential savings for qualifying buyers. Despite these advantages, accessing the updated benefits involves navigating a somewhat intricate process.

Qualifications and Price Limits for Vehicles

Starting in 2024, buyers of both new and used electric vehicles (EVs) can benefit from a tax credit, though several key limitations apply. New sedans and passenger cars must have a purchase price of $55,000 or less to qualify. Vans, SUVs, and pickup trucks are eligible only if their manufacturer’s suggested retail price (MSRP) does not exceed $80,000. For used EVs, the credit applies to vehicles with a price cap of $25,000.

In addition, vehicles qualifying for the credit must weigh under 14,000 pounds. Used EVs also must be at least two years old to qualify.

Requirements for Battery Components and Mineral Sourcing

To meet eligibility, 50% of a vehicle’s battery components must be manufactured or assembled in North America. Additionally, at least 40% of the critical minerals used in the battery must originate from North America. Failing to meet one of these conditions results in a reduced credit of $3,750.

This stipulation aligns with the U.S. government’s broader objective to reduce reliance on materials from nations considered “countries of concern.” Starting in 2024, components sourced from such countries will be disqualified. From 2025, this restriction will also apply to critical minerals.

Income Eligibility for Buyers

The revised tax credits also come with income-based limitations.

• New EV buyers:
  • Single filers: Income must not exceed $150,000.
  • Heads of household: Limit is $225,000.
  • Joint filers: Eligible up to $300,000 combined income.
  • Married taxpayers filing separately: Income cannot exceed $150,000.

• Used EV buyers:
  • Single filers and married individuals filing separately: Income must not exceed $75,000.
  • Heads of household: Limited to $112,500.
  • Married joint filers: Income cap of $150,000.

Credit Amounts

Taxpayers purchasing a new EV in 2024 may claim up to $7,500 in credits. For used EVs, the credit is capped at 30% of the purchase price, with a maximum benefit of $4,000. However, taxpayers can only claim the used EV credit once every three years.

Dealer Involvement and Direct Application

A new feature allows buyers to transfer credit directly to the dealer starting January 1, 2024. If the buyer and vehicle meet all qualifications, this transfer can reduce the purchase price of a new car by $7,500 or a used car by up to $4,000 at the point of sale. While this eliminates the buyer’s ability to claim the tax credit later, it simplifies the process and provides immediate savings. Credits may also apply to leased vehicles, offering an opportunity to lower monthly payments by reducing the vehicle’s sale price.

Claiming the Credit

Taxpayers choosing not to transfer their credit to the dealer must claim it themselves by filing IRS Form 8936 with their tax return. They will need to include the vehicle identification number (VIN) as part of the verification process. However, the credit cannot exceed the amount of tax owed, and any unused credit cannot be carried forward to future years. Please refer to your state-specific electric Vehicle Tax credit and registration fee listed here.