Summary

The EV tax credit is a federal incentive that offers up to $7,500 for buying a new, qualified plug-in electric vehicle (EV) or fuel cell vehicle (FCV) in 2023 or after. The credit is nonrefundable, which means it can only reduce your tax liability and not give you a refund. The credit amount depends on the battery capacity, the date of delivery, and the critical mineral and battery component requirements of the vehicle. The credit is also subject to income limits and phase-out rules based on your modified adjusted gross income (AGI) and the manufacturer’s sales volume. To claim the credit, you need to file Form 8936 with your tax return and attach the information provided by the seller at the time of sale.

Detail Explanation

If you are interested in buying a new, clean vehicle, you may be eligible for a generous tax credit from the IRS. The EV tax credit, also known as the clean vehicle tax credit, is a nonrefundable tax credit that can lower your tax bill by up to $7,500 when you buy a new, qualified plug-in EV or FCV in 2023 or after. The credit was recently modified by the Inflation Reduction Act for years 2023 through 2032 to expand and extend the incentive for more consumers and vehicles.

However, not everyone and every vehicle can qualify for the credit. There are several criteria and conditions that you need to meet to be eligible for the credit. Here are the main factors that determine who qualifies for the EV tax credit:

• The type of vehicle: The vehicle must be a new, qualified plug-in EV or FCV that is propelled by an electric motor that draws electricity from a battery or a fuel cell that has a capacity of at least 4 kilowatt hours (kWh) and can be recharged from an external source of electricity. The vehicle must also have a gross vehicle weight rating (GVWR) of less than 14,000 pounds and meet the emission standards set by the Environmental Protection Agency (EPA). The vehicle can be a car, a light truck, a motorcycle, or a three-wheeled vehicle. The vehicle must be made by a manufacturer that is registered with the IRS and reports the required information to the IRS and the buyer. The IRS maintains a list of qualified vehicles on its website¹.

• The battery capacity of the vehicle: The battery capacity of the vehicle determines the base amount of the credit. The vehicle must have a battery capacity of at least 7 kWh to qualify for the credit. The credit equals $2,500 plus $417 for each kWh of capacity over 5 kWh, up to a maximum of $7,500. For example, if the vehicle has a battery capacity of 10 kWh, the base credit amount is $2,500 + ($417 x 5) = $4,585.

• The date of delivery of the vehicle: The date of delivery of the vehicle determines the additional amount of the credit based on the critical mineral and battery component requirements of the vehicle. The date of delivery is the date you take possession of the vehicle, regardless of the purchase date. For vehicles delivered from January 1 to April 17, 2023, the credit amount is based on the battery capacity only. For vehicles delivered from April 18, 2023 and after, the credit amount is also based on the critical mineral and battery component requirements of the vehicle.

• The critical mineral and battery component requirements of the vehicle: For vehicles delivered from April 18, 2023 and after, the vehicle must meet certain requirements for the use of critical minerals and battery components to qualify for the full credit. Critical minerals are minerals that are essential for the economic and national security of the U.S. and have a high risk of supply disruption. Battery components are materials that are used to make the battery cells and modules of the vehicle. The vehicle must meet either or both of the following requirements:

  • The vehicle must use at least 75% of critical minerals that are sourced from the U.S. or its allies, or recycled or reclaimed from end-of-life products. If the vehicle meets this requirement, it qualifies for an additional credit of $3,750.
  • The vehicle must use at least 50% of battery components that are manufactured in the U.S. If the vehicle meets this requirement, it qualifies for an additional credit of $3,750.

  If the vehicle meets both requirements, it qualifies for the full credit of $7,500. If the vehicle meets neither requirement, it does not qualify for any credit.

• The income limit of the taxpayer: The income limit of the taxpayer determines the eligibility for the credit based on the modified adjusted gross income (AGI) of the taxpayer. The modified AGI is the AGI from the year you take delivery of the vehicle or the year before, whichever is less. The income limit is:

  • $300,000 for married couples filing jointly
  • $225,000 for heads of households
  • $150,000 for all other filers

  If your modified AGI is below the threshold in one of the two years, you can claim the credit. If your modified AGI is above the threshold in both years, you cannot claim the credit.

• The phase-out rule of the manufacturer: The phase-out rule of the manufacturer determines the availability and the amount of the credit based on the sales volume of the manufacturer. The credit begins to phase out for a manufacturer once it sells 200,000 qualified vehicles in the U.S. The phase-out period lasts for one year, starting from the second quarter after the quarter in which the manufacturer reaches the 200,000-vehicle limit. The credit is reduced by 50% in the first two quarters of the phase-out period, and by 75% in the last two quarters of the phase-out period. The credit is eliminated for vehicles delivered in the quarter after the phase-out period ends. For example, if a manufacturer reaches the 200,000-vehicle limit in the first quarter of 2023, the phase-out period will start from the third quarter of 2023 and end in the second quarter of 2024. The credit will be 50% in the third and fourth quarters of 2023, 25% in the first and second quarters of 2024, and zero in the third quarter of 2024 and after.

To claim the credit, you need to file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit, with your tax return. You also need to attach the information provided by the seller at the time of sale, such as the vehicle identification number, the date of delivery, the battery capacity, and the critical mineral and battery component percentages. The seller must register online and report the same information to the IRS. If the seller fails to do so, your vehicle will not be eligible for the credit.

Key Points

• The EV tax credit is a federal incentive that offers up to $7,500 for buying a new, qualified plug-in EV or FCV in 2023 or after.
• The credit is nonrefundable, which means it can only reduce your tax liability and not give you a refund.
• The credit amount depends on the battery capacity, the date of delivery, and the critical mineral and battery component requirements of the vehicle.
• The credit is also subject to income limits and phase-out rules based on your modified AGI and the manufacturer’s sales volume.
• To claim the credit, you need to file Form 8936 with your tax return and attach the information provided by the seller at the time of sale.

Tips for the Reader

• If you are interested in buying a new, clean vehicle, make sure you check the eligibility criteria and the credit amount for your vehicle before you make the purchase.
• If you are eligible for the credit, make sure you keep the information provided by the seller at the time of sale and file Form 8936 with your tax return.
• If you have any questions or doubts about the credit, contact the IRS or a tax professional for assistance.

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