What You Need to Know About the Federal Tax Credit for Electric Cars

As the world strives to minimize carbon emissions, governments across the globe are giving their citizens incentives to encourage them to purchase electric cars. In the US, the federal government has offered federal tax credits of as much as $7,500 for buying electric vehicles (EVs) or plug-in hybrid vehicles (PHEV) since 2008.

This law has seen some significant changes, and more are expected as we head to 2024. While many people can benefit from these tax credits, certain conditions should be met. Read on to learn about the Federal Tax Credit for electric cars if you want to buy a new or used EV.

What is the federal tax credit for electric vehicles?

The electric vehicle tax credit is a nonrefundable tax credit given to taxpayers who buy qualifying electric cars or plug-in hybrids. Until the end of 2023, tax credit for EVs reduces the amount of taxes you owe the federal government and can be deducted when you file taxes the following year. Because it is nonrefundable, you won't get a refund even if you qualify for the whole $7,500, but your tax bill is below this figure.

However, starting January 2024, you will be able to get your tax credit as a discount when you buy a qualifying car instead of waiting until you file taxes. This means the amount you qualify for will be deducted from the price of the vehicle.

Who qualifies for the federal tax credit for electric cars?

Although a lot has changed in qualifying cars for tax credits, not much has changed in the eligibility of the party owning the vehicle. Nonetheless, it's essential to understand the different eligibility requirements, whether you want a used or new electric car.

When buying a new electric car, you will only qualify for the tax credit if your modified adjusted gross income is below $300,000 for married couples, $225,000 for heads of households, and $150,000 for single filers. The AGI (Adjusted Gross Income) used is from the year you took delivery of the car or the previous year.

If you are buying a used electric car, your modified adjusted gross income must be less than $150,000 for married couples, $112,500 for heads of households, and $75,000 for single filers. Moreover, the car should not be for resale, you should not be the original owner, or you should not have claimed another used electric car in the last three years.

Which vehicles qualify for EV tax credit?

The qualifying rules for EV tax credits have been changing year after year. It's no wonder the list of qualifying EVs released last year is shorter than this year, and it's expected even more EVs won't meet the cut in 2024. Tesla even has a disclaimer informing customers that some of their EVs eligible for full EV tax credit now might not qualify in 2024.

However, it has not been all bad. The lifting of the 200,000 vehicle sale limit in 2023 enabled General Motors and Tesla customers to benefit from the tax credit program.

So, what are the requirements for EVs to qualify for the tax credit?

Manufacturer's suggested retail price (MSRP)

To qualify for the EV tax credit, the MSRP for sedans, wagons, hatchbacks, and other similar cars must be below $55,000. Similarly, the MSRP for SUVs, pickups, and vans must also not exceed $80,000.

Keep in mind that this doesn't refer to the actual retail price of the car. Therefore, even if you buy a luxury car discounted to below the said price, you'll still not qualify for a tax credit. However, on the positive side for buyers, most manufacturers have recently reduced the prices of EVs, probably to capitalize on the opportunity.

Final production of the EV

The US government also requires the final assembly of EVs to occur within North America (including Mexico and Canada) for them to be eligible for tax credits. This move has left many automakers that assemble their vehicle outside North America very aggrieved. In fact, the European Union already has plans to challenge it, saying the rule is against International trade agreements.

Unfortunately, this means you aren't eligible for tax credit if you purchase an EV from Hyundai, Audi, Porsche, Kia, or Genesis. The government says the move is meant to incentivize locally produced EVs and encourage more EV automakers to assemble their cars within North America. In response to this directive, major foreign automakers are already planning to start assembling their EVs in North America.

Battery raw material and production

Battery production rules also affect EV tax credit eligibility. In fact, it is far more than you would expect. As of 2023, whether you will receive a tax credit depends on where the raw materials for the battery were sourced and where the battery components were made. The credit has been split into two.

The battery must have been produced or assembled in North America to be eligible for the first $3,750. To be eligible for the second $3,750, 50% of raw material used in battery production must come from the US or its free trade agreement partners. Additionally, none of the materials can be sourced from China, North Korea, Iran, or Russia, and neither can any part of the assembling a car. The 50% threshold will increase by 10% each year starting from 2024 and is expected to hit 90% by 2027.

So, what if you want a used EV? What are the requirements? Effective 2023, qualifying used EVs are eligible for a tax credit of up to $4000 or 30% of the vehicle buying price or, whichever is lower. Here are the requirements;

• The EV must be purchased from a dealer (private-party sales are not eligible)
• Only eligible for the first transfer of the EV
• The EV must be primarily used in the US
• The buying price must be $25,000 or below 
• Vehicle gross weight must be below 14,000 pounds
• The vehicle model must be two years old 
• EVs for personal use and not businesses 
• You should not have claimed tax credit for a used car in the last three years.

What if you want to lease? Do you get the tax credit? Yes, but not directly. The dealer gets the commercial credit and passes some of those savings to you by charging lower lease payments. This is good news for those who don't qualify for tax credits.

How do you claim the EV tax credit?

You can only claim your EV tax credit when filing your federal income taxes. This means if you purchased a qualifying EV in 2023, you will claim your credit when filing your 2023 tax return (in 2024). You will fill out Form 8936 and file it along with your tax returns. Remember to include the vehicle identification number (VIN).

However, starting in 2024, you will be able to use your credit at the time of purchase. This means you will pay less the amount of credit you qualify for. Dealers just need to register with Energy Credits Online, and the system will enable them to verify vehicle eligibility.

Bottom line

Tax credits are an effective way to lower the cost of electric vehicles. And although there are so many rules, it's still possible to benefit from the full tax credit. However, to avoid disappointments at the point of sale, it is important to ensure you meet all requirements and research how much the car you want qualifies for.

If the EV is not eligible for credits, consider leasing. Besides cost savings and fewer restrictive tax credits, leasing may offer other benefits over purchasing an EV.

Most companies have a buyout or payoff amount, meaning you can pay them to buy the EV outright. However, be sure to check the terms and conditions stated in your agreement to confirm whether your EV qualifies for a lease buyout.