EV Buying & Leasing
How The EV Tax Credits Work (USA)
How The EV Tax Credits Work (USA)

How The EV Tax Credits Work (USA)

Update August 17, 2022:

The tax credit offered by the U.S. Federal government has gone through extensive changes with the passage of the Inflation Reduction Act (IRA). The info below has been updated to reflect this newly modified credit. Currently, the terms set in the IRA are set to expire in 2032.

Disclaimer: EV.Guide cannot ensure that you or anyone will be eligible for any tax credit or rebate. We’ve done our best to interpret the Clean Vehicle Credit as spelled out in the Inflation Reduction Act, but we cannot guarantee accuracy of this information. Please consult a qualified tax professional. Nothing on this site should be interpreted as financial advice.

The U.S. federal government offers tax incentives up to $7,500 on the purchase of a qualifying electric vehicle, now called the Clean Vehicle Credit. To qualify, both you the buyer and the vehicle you’re buying need to satisfy certain requirements. This gets a little complicated, so let’s break it down.

Income Caps

The tax credit aims to help those who might struggle to afford an EV, so there are now limits on the amount of income the buyer may earn annually. If you earn more than these limits, you will not qualify for the Clean Vehicle Credit. This limits are:

  • $150,000 for individuals
  • $225,000 for head of household
  • $300,000 for joint filers

Vehicle Price Limits

In addition to the income caps above, the Clean Vehicle Credit introduces a new limit on the price (MSRP) of the vehicle. Any vehicles that cost more than these limits will not qualify. Keep in mind that while the base model of a certain vehicle may qualify, the trim you choose or the optional features that you add may push the price past these limits, disqualifying the car from the credit entirely. These price limits are:

  • $55,000 for cars
  • $80,000 for trucks, SUVs and vans
  • $25,000 for used vehicles

Where it gets tricky is how to determine what's a car, and what's an SUV. In a world full of crossovers, that can be tricky. For example, Ford's Mach-E and Escape PHEV vehicles are very similar in form factor, but the Mach-E is classified as a "car" with a limit of $55,000 while the Escape is classified as an SUV with a cap of $80,000. When searching for vehicles on this site, we point out how each has been classified for the credit, if they qualify.

From here, the Clean Vehicle Credit is split into two sections, each representing half of the available credit. For each section that a vehicle satisfies, they will qualify for $3,750.

Made in North America

While the old tax credit determined the amount of credit available based on battery size, the new credit is more concerned with where the car and its battery are made. The credit now requires that the vehicle and battery go through final assembly in North America, and that a certain percentage of battery components are manufactured or assembled within North America. The idea is that local manufacture of batteries support American jobs, but it’s also better for the environment to keep the supply chain localized as well. Remember, the carbon footprint of a car isn’t just the energy to drive the wheels, but the energy required to produce the vehicle (including the shipping of parts and a final assembled vehicles around the world on heavily polluting ships). If a vehicle satisfies this provision, it will earn one half of the full credit, or $3,750.

Under this provision, the percentage of battery components that must be manufactured or assembled in North America will get stricter every year, and breaks down like this:

  • 2023 50%
  • 2024: 60%
  • 2025: 60%
  • 2026: 70%
  • 2027: 80%
  • 2028: 90%
  • 2029: 100%

Critical Materials & Recycling

To earn the second half of the credit, at least 50% of the vehicle’s battery minerals must be extracted or processed in North America or in a country that has a free trade agreement with the USA, or must use minerals that were recycled in North America. This stipulation will grow stricter between now and 2028, breaking down like this:

  • 2023 40% of battery
  • 2024: 50% of battery
  • 2025: 60% of battery
  • 2026: 70% of battery
  • 2027: 80% of battery
  • 2028: 100% of battery

Car’s that qualify will receive $3,750, which when combined with the made in North America provision can bring the full credit to $7,500.

Used Vehicle Incentive

Beginning January 1, 2023, buyers can receive a tax credit on a used EV, up to $4,000, if the vehicle is less than 2 years old and costs less than $25,000. The used vehicles do not have to comply with the “made in North America” components of the credit described above, but they do need to be sold by a dealer (private sales will not qualify). The used vehicle incentive also has its own income cap:

  • $75,000 for individuals
  • $112,500 for head of household
  • $150,000 for joint filers

No more sales limits per automaker, as of January 1, 2023.

The old credit used to phase out credits for an automaker after they sold 200,000 EVs. Because of this, there were 3 automakers who no longer qualified for the old credit: Tesla, GM and Toyota. Under this new credit, these limits will be removed meaning that after January 1, 2023, Tesla, GM and Toyota are once again eligible for the credit  (as long as their vehicles meet the the rest of the Clean Vehicle Credit requirements).

"Foreign Entities of Concern"

Starting in 2024, vehicles cannot use battery materials sourced from “foreign entities of concern”.

Starting in 2025, vehicles cannot use critical minerals sourced from “foreign entities of concern”.

This is pretty loosely defined, and it’s not yet clear which foreign entities are considered concerning.

Point of Sale

Currently, the Clean Vehicle Credit is claimed when filing your taxes. Because this is a tax credit and not a rebate, you must have enough tax liability to take advantage of the credit. For example, if a car qualifies for the full $7,500 credit but you only owe $5,000 in taxes after all other deductions, you would only benefit from $5,000 of the $7,500 credit. Starting in 2024, the buyer can elect to “transfer” the credit to the dealer. This allows the dealer to claim the credit instead of the buyer, and pass the savings through to the customer instantly in the form of a rebate.

Commercial EVs

Commercial EVs will also be eligible for tax credits, but have their own stipulations.

  • The eligible credit amount per vehicle is the lesser of 30% of the sales price or the incremental cost of the vehicle (the incremental cost being defined as the difference between the purchase price and a comparable gasoline engined vehicle).
  • The tax credit is capped at $7,500 for vehicles with a GVWR (gross vehicle weight rating) of 14,000 lbs or less
  • The tax credit is capped at $40,000 for vehicles with a GVWR of more than 14,000 lbs
  • The vehicle must be used for business purposes

So, that’s pretty complicated right? You’re probably thinking, “can you just tell me which vehicles qualify?” Fortunately, we have a list from the government itself: Fueleconomy.gov provides the following list of qualifying vehicles: https://www.fueleconomy.gov/feg/taxevb.shtml

Other Incentives

In addition to the federal tax credit, many individual U.S. states have incentives available in various forms. Many power utilities will also offer incentives around the purchase of an electric vehicle, and/or the installation of an EVSE (charging unit) at home. Check with your utility company before purchase to find out if there are any incentives available, and any steps you may need to take prior to delivery.

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