How to get a tax credit for an electrified vehicle

On August 16, 2022, prospective electric vehicle (EV) and plug-in hybrid (PHEV) buyers received some good news. That’s the day the Clean Vehicle Credit, a part of the Inflation Reduction Act, was signed into law, renewing tax credits for EVs, PHEVs, and fuel-cell vehicles—albeit with significant changes. The new directives are more complicated, and sorting out the specifics takes some work.

In brief, some new and used EVs, PHEVs, and fuel-cell vehicles qualify for a tax credit of up to $7,500 for new vehicles and up to $4,000 for used vehicles. Unlike before, there’s no limit to how many eligible vehicles an automaker can sell. The credits will remain in effect through December 2032.

The new legislation’s main changes involve added criteria for vehicle and purchaser eligibility, such as:

• Where a vehicle is made.
• How much it costs.
• Where the battery materials come from.
• Where the battery is made.
• What the buyer’s annual income is.

In the short term, fewer new EVs may qualify for credits, and it might be more of a hassle for consumers to find an eligible vehicle. But in the longer term, the rules are designed to make EVs more affordable, to shift EV vehicle and battery production from foreign countries—China, for example—back to North America, and to lessen the reliance of U.S. manufacturing on foreign supplies. Here are the important things to know:

1. Final assembly location. To qualify for a full tax credit, a new clean vehicle’s final assembly must take place in North America. Some clean vehicles are assembled in multiple locations and, as a result, they might not qualify for a credit or only for a partial credit.

2. Price is a factor. Whether a vehicle qualifies for a tax credit also depends on its manufacturer’s suggested retail price (MSRP), not the purchase price. The MSRP for SUVs, pickups, and vans may not exceed $80,000. For sedans, wagons, and hatchbacks, the limit is $55,000.

3. Battery materials and components. This provision has two parts.

First, to qualify for a tax credit, a specified percentage of an EV’s or PHEV’s critical battery materials must be sourced from North America or a country that has a free-trade agreement with the U.S.

Second, a specified percentage of battery’s components must be manufactured or assembled in North America or in a country with a free-trade agreement with the U.S.

Consumers will get the full credit only if a vehicle fulfills both conditions; if it fulfills just one condition, they’ll receive a credit of $3,750.

If you’re interested in details regarding percentage requirements for sourcing/extraction of battery materials and the manufacture of battery components, go to the U.S. Department of Energy's Alternate Fuel Data Center website.

4. Income matters, too. Certain income guidelines apply:

• Married couples and surviving spouses with a modified adjusted gross income of less than $300,000 qualify.
• Heads of household with incomes below $225,000 qualify.
• Individuals and married people who file separately with an income below $150,000 qualify.

The credit isn’t refundable. For example, if you owe, say, $6,500 in federal income taxes, that’s the maximum credit you receive.

To find out whether a clean vehicle model you’re interested in buying qualifies for a tax credit, go to the U.S. Department of Energy's Fuel Economy website and enter the relevant information. To see a complete list of eligible vehicles, select “All” under the “Make” filter. In late 2023, about 2 dozen models qualified for full or partial credit.

To find out if a specific vehicle (say, at a dealership) qualifies for a tax credit, check out its Final Assembly Point information, typically found on its window sticker. Or you can type its vehicle information number (VIN), also located on the window sticker, into the National Highway Traffic Safety Administration VIN decoder.

Those are the main provisions of the legislation. But, as the saying goes, Wait, there’s more!

1. Used EVs and PHEVs also qualify. For the first time, buyers who purchase a qualifying used EV, PHEV, or fuel-cell vehicle will receive a tax credit of either $4,000 or 30% of the vehicle’s sale price, whichever is less. The requirements include:

• The vehicle must be at least 2 calendar years old.
• It must be purchased from a dealer.
• The sales price must be $25,000 or less.
• A tax credit applies only once in a vehicle’s lifetime.

There’s an income limit with used EVs and PHEVs, too: $150,000 for joint filers and surviving spouses, $112,500 for heads of households, and $75,000 for individuals and married people who file separately.

Also worth noting: Used clean vehicles don’t have to comply with made-in-North America restrictions.

For more information on tax credits for used clean vehicles plus a list of nearly 100 currently eligible, go to the DOE's Fuel Economy website.

2. No waiting. Beginning in 2024, car buyers will be able to transfer the tax credits to a car dealership at the time of purchase. In other words, the tax credit functions as an immediate price-lowering discount rather than as a credit applicable at tax time.

3. What about leased clean vehicles? Dealers—not the person leasing the vehicle—receive credits for leased vehicles. As an incentive, dealers often pass the savings on to the consumer by reducing a vehicle’s capitalized cost. Many of the restrictions on purchased clean vehicles (maximum price, final assembly location, etc.) don’t apply to lease deals, making a wider range of prospective vehicles available.

4. Home chargers. The Inflation Reduction Act also brings back a tax credit for home EV chargers—30% of the cost of hardware and installation, up to $1,000 in eligible locations. This credit is intended for residents of low-income communities and non-urban areas.

For the latest information on federal tax credits, go to the DOE's Fuel Economy website. The IRS also maintains a list of frequently asked questions and answers about tax credits; type “IRS FAQ clean-vehicle credits” into your search engine.

For information on state incentives, check out the DOE's Alternative Fuel Data Center. County and city incentives and incentives from utility companies might be available, too. To find out, type the appropriate state/county/city/utility information plus “electric vehicle rebates” into your search engine.

The Automotive Research Center is a state-of-the-art test facility in Los Angeles that has been performing emissions, fuel economy, and safety tests on vehicles for more than 50 years.

This article was adapted and updated from the 2023 AAA Car Guide.