October 2nd 2023.
Do you plan on purchasing a new vehicle within the next ten years? If the answer is yes, there's a good chance you want to know how EV credits work.
EV credits, or Qualified Plug-In Electric Drive Motor Vehicle Credits, are available from the US government in the form of a tax credit. This credit has been around for a while, but the rules changed in the summer of 2022 with the passing of the Inflation Reduction Act (IRA).
Under the rules prior to 2022, purchasers of a qualified electric vehicle could claim a non-refundable credit of $2,917 for a vehicle with a battery capacity of at least 5 kilowatt hours, plus $417 for each kilowatt over 5 kilowatts, up to a maximum of $7,500.
The criteria for the vehicle to qualify were that it must have been purchased brand new, have an external charging source, be used in the United States primarily, have a gross weight rating of less than 14,000 lbs, and not be purchased to resell.
Additionally, the manufacturer could not sell more than 200,000 EV’s in the U.S. GM, Tesla, and Toyota all reached this threshold by Q4 2018, Q1 2020, and Q2 2022, respectively, making them ineligible for any more credits under the old rules.
Starting in 2023, the maximum credit is still a non-refundable $7,500, but the EV credits work differently. The IRA broadened the range of vehicles that qualify, but restricted the amount of taxpayers able to take them. For brand new EV’s, the criteria remain the same as before the IRA, with the addition that the final assembly of a qualified EV must be completed in North America.
The IRA also opened up the EV credit to used vehicles, limited to $4,000. The criteria for a used EV to qualify includes that it must be the first sale other than to the original owner, must be at least two years old, and had to be a qualified EV when sold new. Additionally, the credit is limited to 30% of the purchase price, and the purchase price must be less than $25,000. This credit can only be claimed once every three years.
The MSRP restrictions of the EV credit can make it hard to qualify, as they can quickly exceed the thresholds. For example, the base price of a Ford Lightning truck starts at $69,995, but with the extended range battery option and a tonneau cover, the MSRP jumps to $81,040, making this EV ineligible for any credits.
Additionally, there are AGI limitations for claiming the EV credit. You cannot claim an EV credit if your AGI exceeds $300,000 for Married Filing Jointly, $225,000 for Head of Household, or $150,000 for all other taxpayers.
If the EV credit is a major deciding factor in your car purchasing process, make sure you know how EV credits work. As long as you follow the rules and don't make too much money, you should get a nice big tax credit.
And if you're looking for more information on additional clean energy property credits, make sure to read our post "Inflation Reduction Act: Tax Credits for Homeowners".
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