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Do soaring gas prices have you wishing for an electric vehicle? If so, federal tax credits may help make that wish a reality.
Since 2008, the qualified plug-in electric drive motor vehicle credit has provided up to $7,500 in nonrefundable tax credits on your federal tax return when you purchase a qualifying electric or plug-in vehicle. The Inflation Reduction Act, which went into effect in August 2022, provides for continued credits but with new requirements and a revised list of qualifying vehicles.
For details on what's changing with the new clean vehicle credit and how to qualify for a tax credit on a new or used electric vehicle (EV) or fuel cell electric vehicle (FCEV), read on.
Is the EV Credit Still Available?
Following the enactment of the Inflation Reduction Act, tax credits for qualifying vehicles were still available throughout 2022, but the rules began transitioning in August of 2022 and have changed substantially starting in 2023.
In 2022, the credit that applied to qualifying new electric and plug-in hybrid passenger vehicles and light trucks was equal to $2,917 plus $417 for every kilowatt hour of battery capacity in excess of five kilowatt hours—up to $7,500 in total credits. Credits for vehicles from manufacturers that sold more than 200,000 qualifying vehicles, including General Motors, Toyota and Tesla, were either reduced or eliminated in 2022.
Additionally, vehicles purchased after August 16, 2022, only qualified for the credit if they underwent final assembly in North America. See the Department of Energy list of qualifying vehicles as well as a VIN decoder from the National Highway Traffic Safety Administration to confirm a vehicle's final assembly location.
To claim the qualified plug-in electric drive motor vehicle credit on your 2022 taxes, file IRS Form 8936 with your tax return. Note that this credit is nonrefundable, meaning you won't receive more in credit than you owe in taxes. If your overall tax bill for the year is $5,500, you can't claim more than $5,500 in EV credit even if your vehicle qualifies. Keep your purchase documents with your tax return in case you're audited.
How Do Clean Vehicle Credit Requirements Change in 2023?
Manufacturer sales caps will be removed in 2023, but the list of vehicles that qualify for the full updated credit is expected to be short, at least in the beginning. Starting in 2023, vehicle eligibility will be based on where the vehicle's battery is manufactured and sourced:
- EVs and FCEVs qualify for a $3,750 tax credit if at least 50% of the battery's components have been manufactured or assembled in North America. The 50% amount increases to 60% in 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% in 2029 and thereafter.
- An additional $3,750 in tax credits is available for vehicles with batteries that have a percentage of their critical minerals extracted or processed in the U.S. or a U.S. free-trade agreement partner, or recycled in North America. The qualifying percentages go up every year: In 2023, 40% of the critical minerals used must meet this requirement, increasing to 50% in 2024, 60% in 2025, 70% in 2026, and 80% in 2027 and thereafter.
- Beginning in 2024, any vehicle with battery components sourced from a foreign entity of concern are excluded from the tax credit. In 2025, vehicles with critical minerals sourced from a foreign entity of concern are also excluded.
- Your modified gross income must not exceed $150,000 for single filers, $225,000 for heads of household and $300,000 for married couples filing jointly.
- The vehicle's MSRP must be $80,000 or less for SUVs, vans and trucks, or $55,000 for all other vehicles.
In 2023, as in years prior, you'll claim your clean vehicle credit on your tax return. This means you won't receive cash upfront and will have to finance your vehicle without factoring in any of the tax savings you'll see. But starting in 2024, you may be able to have the credit applied at the dealership, which would effectively reduce your purchase price.
Used Vehicle Credits Start in 2023
Beginning in 2023, used electric vehicle purchases may also be eligible for a tax credit. The credit is worth up to 30% of the vehicle sale price with a maximum credit of $4,000. Additionally, your vehicle must meet the following requirements:
- Sales price of less than $25,000
- Must be at least two years old
- Must be purchased from a dealer
- Applies to the first transfer of vehicle only
- May be claimed once in three years
- Your modified gross income must not exceed $75,000 for single filers, $112,500 for heads of household and $150,000 for joint filers
Do Electric and Hybrid Cars Really Save You Money?
Switching to a plug-in hybrid or electric car can help you break up with the gas pump—or, in the case of plug-in hybrids, minimize an expensive relationship. But fuel costs are only part of the picture. To help figure out whether an electric or plug-in hybrid car will save you money, consider some of the pros and cons:
The cost of the car, including any tax breaks: Cox Automotive, the parent company of Kelley Blue Book, reports the average transaction price for electric cars was $65,291 in September 2022, compared with $48,094 for gas-powered cars. Estimate your monthly payments as well as the total cost of the car to figure out its affordability. Tax credits can help defray the additional cost of buying an EV, but they don't necessarily close the gap and savings may not be realized until you file your taxes.
State and local tax breaks or incentives: Nearly every state provides at least some incentives for EVs and plug-in hybrids. Check with your state government or local utility provider.
The cost per mile: Use the U.S. Department of Energy's Vehicle Cost Calculator to estimate fuel costs based on your mileage and typical gas and electricity costs in your state. To illustrate, we compared data on a gas-powered 2022 Mazda CX-30 to the electric 2022 Mazda MX-30 and found that the annual cost per mile for the electric Mazda was 11 cents cheaper than the gas-powered Mazda. This means the electric model was nearly $1,200 cheaper to operate annually than the gas-powered vehicle for a driver in California paying $5 per gallon for gas and driving 11,000 miles per year.
Insurance costs: Electric vehicles are typically more expensive to insure than gas-powered vehicles. Check with your insurance company or compare rates online to estimate your costs.
Maintenance: Regular maintenance costs are generally lower for electric vehicles, which have fewer moving parts. On the other hand, some of these savings may be offset if you decide to install a fast charging unit in your home.
The Bottom Line
Tax credits can help make the transition to an electric or plug-in hybrid vehicle more affordable. And, though some popular models are no longer eligible for credits, new alternatives exist at a variety of price points.
Even with tax credits, financing a new EV or plug-in hybrid requires planning and good credit. If you're considering a new vehicle purchase or lease, now may be a good time to check your credit score and credit report for free with Experian. You'll get a clearer picture of your financing options so you can explore the best loan or lease opportunities based on your situation.