If you're shopping for an electric vehicle or plug-in hybrid electric vehicle in 2023, you should be aware that some significant changes have been made to the federal EV (Electric vehicles) tax credit eligibility.
Until now, there have been few restrictions on which vehicles qualify for the tax credit.
However new rules established by the Inflation Reduction Act of 2022 will potentially make it harder to claim the tax credit.
Eligibility will depend on the location of the electric vehicle’s assembly, the sourcing of its battery components, and the manufacturers suggest retail price. For the first time, the buyer’s annual household income will also be a qualifying factor.
The changes mean that many electric vehicles that previously qualified for a tax credit won’t any longer.
Below, we set out the key tax credit changes and how they could affect your EV buying decisions.
If you would like help with your EV options, you can also speak with a OneRequest car-buying expert. Schedule a free call here: Full-Service Car Buying
What is new for 2023?
A ‘clean vehicle’ tax credit in two separate amounts of $3,750 (up to $7,500) is available when buying a qualifying electric vehicle. Different brands and models of EVs will qualify for one, both, or neither credit.
For the 2023 tax year, the credits will be available against the purchase of an EV if all the following requirements are met:
- The buyer’s annual adjusted gross income does not exceed $300,000 if filing jointly, $225,000 if head of household, and $150,000 if single.
- The EV has a battery capacity of at least 7 kilowatt hours and a gross vehicle weight rating of less than 14,000 pounds.
- The EV is manufactured in North America (Note - this means that several EV models made by Kia, Hyundai, Genesis, and Audi, will not qualify for the credit at all because they are manufactured outside North America.)
- The price of the EV does not exceed a manufacturer suggested retail price (MSRP) of $55,000 for sedans, and $80,000 for electric SUVs, trucks, or vans. (Note - models like the BMW iX and Lucid Air are now too expensive to qualify even if they meet some of the other requirements of the government's updated EV tax credit rules. However, some models of Tesla will now qualify due to its recently reported price reduction.)
- The EVs battery components and critical minerals are sourced from North America. (Note - $3,750 of the tax credit if at least 40% of the battery materials are sourced from North America, and the other $3,750 if 50% of the battery parts are manufactured and assembled in the US.
**Further clarification on (5) above is due to be released by the US Treasury in March of this year** For vehicles delivered before the guidance is released, the sourcing requirements do not apply.
The IRS has helpfully published a list of all the clean vehicles that meet the above requirements and qualify for the 2023 tax credit.
The list includes Chevrolet, Toyota, and Tesla vehicles, which are once again eligible for the tax credits since the prior sales volume limits no longer apply.
Used Electric Vehicles
For the first-time, there is also an EV tax credit for buyers of used electric vehicles. Used EVs priced $25,000 or less will be eligible for a $4,000 tax credit or 30% of the sales price, whichever is lower. The car must also be at least 2 model years older than the year in which you bought it, and be purchased through a dealership, and not a private party seller.
How is the tax credit received?
The tax credit does not necessarily translate to immediate savings. Instead, the tax credit offers a reduction in your tax liability for a given year. The clean vehicle credit is a “nonrefundable” tax credit. That means buyers only get the full benefit if they have an annual federal tax liability of at least $7,500. The tax credit reduces the amount of tax money you owe to the IRS when you file your taxes for the year. For example, if you are eligible for the full $7,500, and you owe $20,000 in taxes, then your tax owed will be reduced to $12,500.
For now, the tax credit will be applied to your 2023 tax return, which you file in 2024. However, new rules will allow consumers, starting in 2024, to transfer the credit to a dealership, lowering the vehicle’s purchase price.
State and Local Incentives
In addition to the federal tax credit on EVs, some states and local governments offer incentive programs to help new car buyers afford something more efficient. Check out your state's Department of Revenue webpage for information.
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