How the EV Tax Credit Works for 2023

A new federal EV tax credit for 2023 is here, thanks to the Inflation Reduction Act (IRA) — massive tax and climate legislation promoting clean energy. The credit of up to $7,500 for certain electric vehicles, called “clean vehicles,” is supposed to encourage more people to use EVs. However, a year has passed since the IRA was enacted, and there are still many questions about how the EV tax credit works.

• Some buyers wonder if they can claim the credit because of income limits. (More on that later.)
• Due to ongoing changes to U.S. Treasury Department and IRS rules, there are questions about which electric vehicles qualify for the full tax credit.
• Additionally, vehicles may become credit-eligible due to ongoing manufacturing changes and price drops for some popular EV models (e.g., most recently from Tesla. Details below.)

Despite the confusion, electric vehicle tax credits can benefit some consumers. So, here is some information to help you navigate the latest EV credit rule changes for 2023 and better understand which vehicles do (and don’t) qualify — and why. 

And, of course, if you’re eligible, you need to know to claim the EV credit when you file your federal income tax return with the IRS. Read on for some answers.

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EV TAX CREDIT OVERVIEW

How does the EV tax credit work? 

Here are some of the key points to know about the federal electric vehicle tax credit. 

Key points

• Under the IRA, the EV tax credit is in place for 10 years, until December 2032, for electric vehicles placed into service this year (2023). 
• The tax credit is taken in the year you take delivery of a qualifying clean vehicle. 
• The credit is up to $7,500 for new vehicles. The credit amount considers factors like the vehicle’s sourcing and assembly (which must primarily be in North America for the full credit) and when you placed your vehicle into service. (More on all of that below.)
• Certain used/previously owned EVs can qualify for a tax credit of up to $4,000 or 30% of the sales price (whichever is less).
• Beginning in 2024, you can take the EV tax credit as a discount when purchasing the vehicle. 

However, one of the most important points is that there are income limits for the clean vehicle tax break. Here’s what you need to know. 

EV INCOME LIMITS

EV tax credit 2023 income limits

Your modified adjusted gross income (MAGI) is used for the following income limits, which apply to qualifying new clean vehicles. (MAGI, found on Line 11 of Form 1040, often determines your eligibility for various tax breaks and is generally your adjusted gross income (AGI) with certain deductions or income exclusion added.)

When claiming the EV credit, the IRS says that you can use the lesser of your MAGI in the year you take delivery of your EV or your MAGI from the year before you took delivery of the vehicle. 

Income limits for new qualifying electric vehicles

You won't qualify for the EV tax credit if you are single and your modified adjusted gross income exceeds $150,000.

The EV tax credit income limit for married couples filing jointly is $300,000.

And, if you file as head of household and make more than $225,000, you also won’t be able to claim the electric vehicle tax credit.

The EV credit income limit is $150,000 for all other filing statuses.

Qualifications and income limits for previously owned eligible EVs 

You must meet the following criteria to qualify for the federal EV tax credit for eligible used/previously owned clean vehicles.

• Be an individual who bought the vehicle for use and not for resale
• Not be the original owner
• Not be claimed as a dependent on another person’s tax return
• Not have claimed another used clean vehicle credit in the three years before the purchase date

Additionally, for the EV tax credit for used vehicles, the IRS says your MAGI cannot exceed the following income limits.

• $150,000 for married filing jointly or a surviving spouse
• $112,500 for heads of households
• $75,000 for all other filers

*You can use your MAGI from the year you took delivery of the vehicle or the year before, whichever is less.  

QUALIFYING VEHICLES

EV tax credit eligible cars and vehicles

Once you know if you’re income-eligible to claim the electric vehicle tax credit, a big question on EV buyers’ minds is which vehicles qualify. The short answer is that very few models currently qualify for the full $7,500 electric vehicle tax credit. Others qualify for half that amount, and some don’t qualify at all. The reason is stricter rules adopted on April 18 that limited the credit depending on whether a vehicle meets battery and sourcing requirements. 

But first, price limits determine whether a vehicle is eligible for a tax credit.

EV credit vehicle price limits for new vehicles

• Vans, pickup trucks, and SUVs with a manufacturer’s suggested retail 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, a previously owned clean vehicle will qualify for the tax credit only if it costs $25,000 or less. 

Note: “Used” or “previously owned” for the EV tax credit purposes means that the car is at least two years old.

Which vehicles are considered SUVs? More clarity was needed over which vehicles were classified as SUVs for the $80,000 price limit. Treasury and IRS released guidance saying they will use criteria based on the Environmental Protection Agency’s (EPA) Fuel Economy Labeling Standard to determine whether a vehicle is a car or an SUV. Some SUVs are eligible for EV tax credits for automakers and consumers where they weren't previously. 

The new guidance on SUV classification is retroactive to Jan. 1, 2023. So, if you took possession of your EV in January of this year, you can use the new classification to determine whether your purchased vehicle is eligible for the tax credit.

More from Kiplinger Does Your Favorite SUV EV Qualify for a Tax Credit?

Price limits for previously owned EVs

A used/previously owned electric vehicle must meet the following requirements to qualify for the up to $4,000 federal EV tax credit.

• Have a sale price of $25,000 or less
• Have a model year at least two years earlier than the calendar year when you buy it. For example, a vehicle purchased in 2023 would need a model year of 2021 or older
• Not have already been transferred to a qualified buyer after Aug. 16, 2022
• Have a gross vehicle weight rating of less than 14,000 pounds
• Be an eligible FCV or plug-in EV with a battery capacity of at least 7 kilowatt hours
• Be for use primarily in the United States

To see if a vehicle is eligible for the used clean vehicle credit, visit the federal fueleconomy.gov website. 

Battery and sourcing requirements

Another piece of the puzzle with vehicle eligibility deals with battery and sourcing requirements. 

IRS guidance released earlier this year limits the number of EVs that qualify for the full $7,500 EV tax credit. The new 2023 EV tax credit rules address requirements for critical mineral and battery component requirements for electric vehicles and will be finalized later this year. But they are effective for EVs placed into service after April 17, 2023. 

As a result, an electric vehicle that qualified for the up to $7,500 tax credit on April 17 might, as of April 18, qualify for only half the tax credit amount, or perhaps, no EV tax credit at all.

“Treasury is taking an important step that will help consumers save up to $7,500 on a new clean vehicle and hundreds of dollars per year on gas,” Treasury Secretary Janet Yellen said in a statement about the stricter EV credit rules.  

Only a few EVs currently qualify for the full $7,500 tax credit. Some electric vehicles that don’t qualify include about nine models from mainly foreign manufacturers like Hyundai, Volkswagen, BMW, Rivian, Nissan, and Volvo.

• Are you interested in a Cadillac LYRIQ or Chevy Bolt EV?  GM's entire electric vehicle lineup appears eligible for the full $7,500 EV credit. (Note: General Motors plans to discontinue production of the popular Chevy Bolt EV and EUV at the end of 2023.)

Tesla Model 3 tax credit?

Tesla models, like the Model Y and all Model 3 versions, are eligible for the full $7,500 EV credit. (This is a recent change.) Some Tesla models (Model Y and Model 3 Performance) were previously listed on the IRS website as eligible for the full $7,500 federal EV tax credit.

Earlier this summer, Tesla announced that all new Tesla Model 3 versions currently qualify for the full $7,500 EV tax credit for eligible buyers. (Tesla also reduced the starting price of its Model 3.)  

The federal government later confirmed that Tesla Model 3 vehicles qualify for the full $7,500 federal EV tax credit through an update to a list of qualifying vehicles on the fueleconomy.gov website. However, it’s unclear what changes Tesla made to meet the battery and mineral sourcing requirements for the full credit and whether the qualification will remain in place after December 31. So, stay tuned.

At the beginning of September, Tesla announced price cuts to its Model X (down $41,000) and Model S by $30,000. The discount brings the starting price of the Tesla Model X below the $80,000 price limit for the EV credit applicable to trucks and SUVs. (Note: EV tax credit income limits still apply.)

Mullen automotive commercial EVs

As of Sept. 14, Mullen Automotive (NASDAQ: MULN) became an IRS “qualified manufacturer” of commercial EVs. The designation means that some of the automaker’s electric vehicles can qualify for the up to $7,500 EV tax credit. 

Regarding the new designation, John Schwegman, Mullen’s chief commercial officer, acknowledged in a statement that the total cost of ownership is important to commercial customers. Schwegman added, “Tax credits such as these, along with lower fuel and maintenance costs, show a clear advantage for Mullen’s commercial offerings compared to traditional internal combustion vehicles.” 

EV NEWS AND UPDATES

IRS news on EV tax credit

You can find the complete list of vehicles qualifying for the credit on the federal fueleconomy.gov website.

The Department of Transportation also has a tool on its website to 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 when it’s best (tax-wise) to buy an EV.

What else can you do? Double-check the list of qualifying clean vehicles if you’re in the market for a new or used EV. You can also look at the IRS’ FAQ Fact Sheet for the clean vehicle tax credit. 

Also, remember that next year (i.e., in 2024), the EV tax credit rules could change again. Part of the reason is political controversy in Congress surrounding the EV tax credit and concerns from overseas manufacturers about vehicles not qualifying for the tax break. 

• The EU and other countries have expressed concern over the IRA’s manufacturing requirements for EVs. The worry is that the requirement that EVs be primarily built and sourced in North America to qualify for the EV tax credit could negatively impact EU manufacturers.
• Swedish officials and officials from other countries like South Korea (on behalf of manufacturers like Kia and Hyundai) have expressed similar concerns.
• U.S. Sen. Joe Manchin (D-W.Va) has expressed disappointment with the IRS EV credit rules and threatened to sue the administration over its implementation of the IRA.

2024 POINT OF SALE EV CREDIT

2024 EV tax credit point of sale rebate

Another new EV tax credit benefit coming in 2024. 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 point of sale when you purchase the vehicle. 

Essentially, you would be transferring the credit to the dealer, who could lower the vehicle price by the amount of the credit. That means you won’t have to wait until it’s time to file your tax return to benefit from the electric vehicle tax credit.

On Oct. 6, the U.S. Treasury Department released proposed guidance on the EV point-of-sale rebate. The rebate would be available beginning Jan. 1, 2024, but dealers will need to register to be qualified to pass EV credit savings to consumers. Qualified dealers could transfer the value of the federal EV tax credit on eligible vehicles for eligible consumers (income limits apply). That value would either be a cash refund or, as previously mentioned, a discount on the total price of the electric vehicle.

CLAIMING THE EV TAX CREDIT

How to claim the EV tax credit on your return

To claim the EV tax credit, you file IRS Form 8936 with your federal income tax return. You’ll need the VIN (vehicle identification number) for your electric vehicle to complete the form. Form 8936 is used to determine your tax credit for qualified two- or three-wheeled plugin electric vehicles.

But what if you haven’t filed your 2022 federal income tax return yet? (Many taxpayers in several states received more time to file their returns due to severe storms and natural disasters.)

How to get the EV credit on vehicles bought last year

The following guidelines apply to EV buyers who had written, binding sales contracts from last year to purchase EVs that will be placed in service (which means “delivered”) on or after the IRA became effective.

• If you purchased an electric vehicle before the IRA became effective (before Aug. 16, 2022), and that vehicle is otherwise eligible for the old EV tax credit, you can claim that credit under the rules that applied before the IRA. (That's true even if you took possession of the EV after that date.)
• Also, the North American final assembly requirement doesn't apply before the IRA effective date. But remember, you need to have a written, binding sales contract to substantiate your EV credit claim.
• What about EVs purchased and delivered between Aug. 16 and Dec. 31, 2022? If you purchased and took possession of your EV between these dates, the rules for claiming the EV tax credit before the IRA became law still apply, except that the final assembly requirement applies. As a result, you'll need to check to see if the EV you purchased meets the final assembly requirement in the IRA (i.e., is eligible for the EV tax credit). And for more details from the IRS on new EVs purchased last year or before, visit the IRS website.

EV LEASES

What if you're leasing an EV?

There is a tax credit available for leased electric vehicles. But there’s also a “catch.” The tax credit belongs to the lessor, not to you, the lessee.

Under the IRA, leased electric vehicles are classified as "commercial vehicles," making them eligible for the entire federal clean vehicle credit without meeting strict battery and sourcing requirements. That means you could have a more comprehensive selection of electric vehicles to save money if the dealer agrees to pass any tax credit savings on to you. 

However, remember that the lessor receives the tax credit (not you). So, savings you receive, if any, would be a rebate or reduced lease price.

More from Kiplinger  Leasing an EV? There's a Tax Credit 'Loophole' for That

HOME EV CHARGERS

Is there a federal EV charger tax credit?

If you're in the market for an EV home charger, the IRA revives a credit for electric vehicle chargers that previously expired two years ago. The "Alternative Fuel Refueling Property tax credit" is extended for 10 years — through Dec. 31, 2032.

For more information on the federal tax credit for electric vehicle chargers, see Kiplinger's guide to the federal EV charger tax credit.

OTHER IRA TAX CREDITS

Solar and other federal energy tax credits for 2023 

The IRA contains billions of dollars in tax credits and incentives, not just for eligible electric vehicles. There’s a tax break for numerous green home improvements, like installing home solar panels.

More from Kiplinger on Federal Engery Tax Credits

• The Federal EV Charger Tax Credit is Back
• Tax Credits for Energy-Efficient Home Improvements
• Tax Credits in the Inflation Reduction Act: What You Need to Know