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The Inflation Reduction Act, signed by President Joe Biden in August, includes an amended clean vehicle tax credit that could save you a lot of money on a new or used clean vehicle. Purchasing an electric, plug-in hybrid or hydrogen fuel cell vehicle can qualify you for a tax credit of up to $7,500 for a new vehicle or $4,000 for a used one. But there are also many eligibility requirements that limit who can claim the credit.
How Does the New Law Change Clean Vehicle Tax Credits?
The new clean vehicle tax credit amends and replaces the previous qualified plug-in electric drive motor vehicle tax credit that was enacted in 2008. Parts of the new law go into effect immediately, but there's a transition period from the old credit to the new credit for the remainder of 2022.
Aspects of the Old Tax Credit Remain in Effect for the Rest of 2022
The previous tax credit offered up to $7,500 for eligible new vehicles, but it began to phase out once a manufacturer (including Tesla and Toyota) sold over 200,000 qualifying vehicles in the U.S. For the most part, the older credit applies to all vehicle purchases through the end of 2022.
However, if you signed a binding sales contract between August 16 and December 31, 2022, then a new final assembly rule also applies, which requires the final assembly to take place in North America. (If you entered a contract before August 16, 2022, then you can claim the older credit regardless of where the final assembly happened.)
You can use the National Highway Traffic Safety Administration's VIN Decoder tool to find out where a specific vehicle was assembled. The Department of Transportation also released a list of 2022 and 2023 vehicle models that will likely qualify.
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New Rules Starting in 2023
Once the clean vehicle tax credit goes into full effect in 2023, there will be several changes and requirements for vehicles and buyers:
- No more 200,000 vehicle cap: The new tax credit does away with the cap, which could make some vehicles eligible once again.
- Final assembly in the U.S. required: All vehicles must have their final assembly performed in the U.S., which could make some models ineligible even if they would have otherwise qualified for the old credit.
- A larger minimum battery size: Vehicles must have a battery with at least a seven kilowatt hours (kWh) capacity. Previously, vehicles with smaller batteries qualified.
- MSRP caps: New vehicles also can't have a manufacturer's suggested retail price (MSRP) of over $55,000—or over $80,000 for vans, SUVs and pickups. There wasn't an MSRP cap before.
- Taxpayer income requirements: The credit also introduces an income requirement. Taxpayers must now be below the modified adjusted gross income (MAGI) thresholds to qualify for the tax credit: $300,000 for joint filers, $225,000 for head-of-household filers and $150,000 for single filers.
The new tax credit also introduces two new requirements for new vehicle purchases, each of which determines half of the credit's value. For instance, if a vehicle meets all the above requirements but only one of the following, you can only get up to $3,750:
- Critical mineral requirement: Requires the critical minerals in the vehicle's battery to be extracted or processed in the U.S., in a free-trade agreement partner country or recycled in North America. The amount of critical minerals that must meet this requirement phases in 10% per year from 40% in 2023 to 80% in 2027 and beyond. Starting in 2025, a vehicle won't qualify if any of the minerals are extracted, processed or recycled by a foreign entity of concern, which currently includes China and Russia.
- Battery component requirement: Requires the battery's components to be manufactured or assembled in North America. The amount of components that must meet this requirement phases in from 50% in 2023 to 100% in 2029 and beyond. Starting in 2024, a vehicle won't qualify if any battery components are manufactured or assembled by a foreign entity of concern.
There's Now a Tax Credit for Used Clean Vehicles
The clean vehicle tax also includes a tax credit if you buy an eligible used clean vehicle. The basics requirements and limits are:
- The credit is worth 30% of the sale price, up to $4,000 maximum.
- You must buy the vehicle from a dealer, it must be the first time the vehicle is resold and the sale price must be under $25,000.
- The vehicle's model year must be at least two years older than the current year.
- You can only claim the credit once every three years, and your MAGI must be under $150,000 for joint filers, $112,500 for head-of-household filers and $75,000 for single filers.
How Much Could the New Tax Credit Save You?
At most, the clean vehicle tax is worth $7,500 for new vehicles and $4,000 for used vehicles.
Tax credits are generally worth more than tax deductions because they lower your tax bill on a dollar-for-dollar basis. In contrast, tax deductions reduce your taxable income, which saves you around 10 to 37 cents per dollar you receive in deductions (depending on your tax bracket).
To claim the credit, you'll have to fill out Form 8936 and report the vehicle's VIN on your tax return. The tax credit isn't refundable, though, which means it can only offset the federal income taxes you owe—it won't increase your refund if you don't owe taxes. Additionally, you can't roll over any remaining portion to future years if you don't use the entire amount.
While this can limit your savings today, starting in 2024, you'll be able to transfer the tax credit to a dealership—essentially giving you a discount on the vehicle's price. It could be a good option if you don't want to wait for a refund or think you won't owe enough in taxes to take advantage of the entire credit.
What if You're Currently in the Market for a Clean Vehicle?
The new tax credit—and transitionary period at the end of 2022—means there's a lot to consider if you're thinking about buying a clean vehicle.
For example, if you won't qualify for the new credit based on your income or the vehicle's sales price, you might want to lock in your purchase before the end of the year. Some manufacturers may even work with you to sign a contract early and deliver the vehicle next year.
On the other hand, if the vehicle you want doesn't qualify for the older tax credit because the manufacturer has already sold 200,000 vehicles—as is the case with Tesla and General Motors—then you might want to wait until next year. Similarly, waiting is the only option if you're in the market for a used clean vehicle.
There are also some unknowns. For example, the final assembly, critical mineral and battery component requirements might disqualify certain models unless the manufacturer's supply chain changes. Ultimately, one of the goals of the new policy is to encourage manufacturers to make those changes, but we don't know if or when those changes will happen.
Check Your Credit if You're Financing a Vehicle
Many people finance new and used vehicle purchases, and your credit can directly impact your eligibility and the rate you receive on an auto loan. Check your credit score from Experian for free to see where you're at and learn about the factors impacting your score. Improving your score before shopping for an auto loan might help you get an even better deal.