EV Tax Credits Explained: What’s Ahead

You may have heard that President Biden signed the Inflation Reduction Act on August 16, 2022. The massive $739 billion legislation, which passed along party lines in the Democratic-led Senate and House, is designed to reduce the deficit and eventually inflation, by combating climate change, lowering healthcare costs, and increasing taxes on some large corporations. And the good news on the electric vehicle front is that EV tax credits are a notable part of the new law’s clean energy focus.

Some of the Inflation Reduction Act’s changes to the EV tax credit, which are designed to encourage the use of “clean” vehicles, might be seen by industry manufacturers as a mix of good and not-so-good news. And there are some questions about how EV tax credits will work for the rest of 2022. But other changes to the electric vehicle tax credit in the Inflation Reduction Act may be welcomed by some consumers—like you.

Federal EV Tax Credit 2023

First and foremost, for EVs placed into service after December 31, 2022, the Inflation Reduction Act extends the up to $7,500 EV tax credit for 10 years—until December 2032. The exact amount of the credit will be based on a calculation that considers factors like the vehicle’s sourcing and assembly. 

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Additionally, used EVs (i.e., previously owned clean vehicles that are at least two years old) will now have a separate tax credit of either up to $4,000 or 30% of the price of the vehicle, whichever is less. However, a previously owned EV can’t qualify if it’s purchased for resale.

Under the Inflation Reduction Act, the EV tax credit applies to any “clean vehicle.” So, a hydrogen fuel cell car, for example, or a plug-in hybrid vehicle with 4-7 kilowatt hours of battery capacity, could qualify. Some commercial clean vehicles can also qualify—depending on weight.

Another change is that if you’re buying a clean vehicle, you will have the option, beginning in 2024, to take the EV tax credit as a discount at the time you purchase the vehicle. Essentially, you would be transferring the credit to the dealer, who would be able to lower the price of the vehicle by the amount of the credit. This means that you won’t have to wait until tax time to benefit from the EV tax break.

EV Tax Credit 2022

What happens to the EV tax credit for the rest of 2022? The Inflation Reduction Act offers some relief for EV buyers who have written, binding sales contracts from this year to purchase EVs that will be placed in service or delivered in 2023. Essentially, if you purchased an electric vehicle before the Inflation Reduction Act became effective (so before August 16, 2022), and that vehicle is otherwise eligible for the old EV tax credit, you can claim that credit.

EV Tax Credit Income Limit

Although the EV tax credit will effectively be expanded, the Inflation Reduction Act also imposes income limits on who can claim the credit.

If you’re single, and your modified adjusted gross income is over $150,000, you won’t qualify for the EV tax credit. The EV tax credit income limit for married couples who are filing jointly is $300,000. And if you file as head of household and make $225,000 or more, you also won’t be able to claim the credit.

Vehicle price and type also matter. Vans, pickup trucks, and SUVs with a manufacture’s retail suggested price (MSRP) of more than $80,000, won’t qualify for the credit. For clean cars to qualify for the EV tax credit, the MSRP can’t be more than $55,000.

Also, if you buy a used clean vehicle, it will only qualify for the tax credit if it costs $25,000 or less. And in case you were wondering, “used” or “previously owned” for purposes of the EV tax credit, mean that the car is at least two years old.

EV Sourcing Requirements and Manufacturing Requirements

Speaking of limits, before the Inflation Reduction Act, manufacturers that produced more than 200,000 electric vehicles couldn’t qualify for the EV tax credit because it was phased out once the manufacturer reached the 200,000-car cap. The Inflation Reduction Act removes that cap, which means that some cars made by manufacturers who exceeded the 200,000 limit (e.g., General Motors, Toyota, and Tesla) will now be eligible to claim the credit.

However, to spur domestic production of clean vehicles, the Inflation Reduction Act also requires that the final assembly of qualifying clean vehicles occur in North America. 

The final assembly requirement is effective as of the day President Biden signed the Inflation Reduction Act into law (i.e., August 16, 2022). There is a similar requirement that minerals and other key components (i.e., battery components) that are used to manufacture EVs, also be primarily sourced in North America.

EV Charger Tax Credit Expansion

The Inflation Reduction Act also revives a credit for electric vehicle chargers that initially expired on December 31, 2021. The Alternative Fuel Refueling Property tax credit is extended through December 31, 2032.

But the rules for claiming the credit are changed a bit under the Inflation Reduction Act. Essentially, a business that installs an EV charger (and meets certain labor and construction requirements) can still benefit from a tax incentive of up to 30% of the total cost of equipment and installation. Previously the limit on the amount of the credit was $30,000 (which applies to projects completed before the end of 2022). However, under the Inflation Reduction Act, if you complete the installation project after 2022, the tax credit, per property item, is up to $100,000.

For home EV charging station installations, the tax credit is 30% of the costs of hardware and installation for qualified property, like EV chargers.

Also, beginning in 2023, the tax credit for business and home installations will apply to other EV charging equipment, like bidirectional (i.e., two-way) charging equipment.

The tax credit is revived as President Biden announced a $900 billion EV charging station investment plan on September 14. The plan involves building 100 million EV charging stations in thirty-five states. The Biden administration has indicated (opens in new tab) that the approved investment will also span 53,000 miles of national highway.

Which EVs Qualify for the EV Tax Credit?

The North American assembly requirements, and income limits and price caps mean that a segment of high-earning car buyers won’t be able to claim the credit. Also, several popular clean vehicles don’t qualify for the EV tax credit, which has caused some confusion.

In response, the IRS and the Treasury Department have published information designed to help you (opens in new tab) know whether the vehicle you want to buy will qualify for an EV tax credit under the Inflation Reduction Act. That information includes a list of vehicles that do qualify (opens in new tab) and answers to frequently asked questions.

The Department of Transportation also has a tool on its website (opens in new tab) where you can enter the vehicle identification number (VIN) of the electric vehicle you're interested in to determine its eligibility for the EV tax credit. This guidance might help you decide whether it’s better (tax-wise) to wait and buy an EV next year, or to make that purchase now.

Warnock's Affordable Electric Vehicles for America Act

In other EV news, U.S. Sen. Reverend Raphael Warnock (D-Ga.) has encouraged the Biden administration to consider flexibility in the implementation of EV tax credit reforms. The Georgia senator also recently proposed the Affordable Electric Vehicles for America Act (opens in new tab), which would create a phase-in-period for the Inflation Reduction Act’s EV sourcing and manufacturing requirements.

Essentially, if passed, the battery sourcing requirement wouldn’t go into effect until 2025, and the final assembly requirement would be delayed until 2026. The idea is that if automakers have more time to meet the new EV requirements, more buyers who purchase electric vehicles will qualify for the $7,500 EV tax credit.

It’s unclear at this time whether the Affordable Electric Vehicles for America Act will gain any traction in Congress.

EV Tax Credit News: EU Concerns

In October, the EU trade chief Valdis Dombrowski expressed concern over the Inflation Reduction Act’s manufacturing requirements for EVs. The EU worries that the new law’s requirement that EVs be primarily built and sourced in North America to qualify for the EV tax credit, could have a discriminatory effect on EU manufacturers. Swedish officials have expressed similar concerns.

As of now, the EU Commission and the U.S. will continue to discuss the issues—during an October 13 press conference, U.S. trade representative Katherine Tai expressed confidence that the two sides can work through concerns regarding the EV tax credits. Similar assurances have been made in response to Sweden's concerns about EV sourcing requirements.
In any case, keep an eye out for proposed EV tax credit regulations, which will likely be issued before the end of the year.

Other Tax Credits in the Inflation Reduction Act

More on tax credits and IRS funding in the Inflation Reduction Act

• The Inflation Reduction Act and Taxes: What You Should Know;
• Save More on Green Home Improvements Under the Inflation Reduction Act;
• Is an Army of New IRS Agents Coming for Your Tax Dollars?; and
• Inflation Reduction Act Boosts Obamacare Tax Credit.