Getting the Most Mileage Out of Electric Vehicle Tax Credits

Federal tax credits for energy efficient vehicles have been around for years. But the Inflation Reduction Act created significant changes to vehicle credits for the 2023 through 2032 tax years that tax professionals need to know about.

The clean energy new vehicle credit—formally known as the “new qualified plug-in electric drive motor vehicle credit”—is available for electric and clean fuel cell vehicles. The vehicle must have a gross vehicle weight rating of less than 14,000 pounds (cars, lightweight trucks, and SUVs), have a battery capacity of seven kilowatt hours, can’t be purchased for resale, and must meet additional requirements.

The manufacturer’s suggested retail price for the vehicle also must fall below a threshold of $80,000 for vans, SUVs, and pickup trucks, and $55,000 for cars. The MSRP is based on the sticker price, meaning the retail price of the vehicle plus any accessory or optional item physically attached to the vehicle at the time of delivery.

When determining the amount of the credit available in 2023, a key factor is the date the vehicle is placed into service. Generally, it’s the date the taxpayer takes the delivery. If a vehicle was placed in service after Jan. 1 and prior to April 18, the credit is based on the vehicle’s battery capacity. The base amount is $2,500, plus $417 for a battery with a capacity of at least 5 kilowatt hours, and an additional $417 for each kilowatt hour of capacity in excess of 5 kilowatt hours, up to a maximum credit of $7,500 per vehicle.

If the vehicle is placed in service after April 18, 2023, the maximum credit is still $7,500. However, the way it’s determined shifts to the new laws and splits into two components. Both components are $3,750, but one is based on domestic critical minerals in the battery, and one is based on the battery meeting sourcing requirements.

Additionally, the vehicle’s final assembly must have taken place in North America for the vehicle to qualify for the credit. If you aren’t sure where it was constructed, a list of qualifying vehicles can be found on the IRS website and a fuel economy website run by the Department of Energy and the Environmental Protection Agency.

Even if a vehicle meets the above-listed requirements for claiming the credit, taxpayers also must qualify. The IRS will be looking at the taxpayer’s modified adjusted gross income to determine eligibility. The limits are $300,000 for married filing joint, $225,000 for heads of household, and $150,000 for all others.

There’s no gradual phaseout of the clean vehicle credit. Once the taxpayer’s modified adjusted gross income exceeds the specified amounts, they no longer qualify. If a taxpayer claims the credit, they must reduce their basis in the vehicle by the credit claimed according to Section 30D(f)(1) of the tax code.

Previously Owned EVs

The Inflation Reduction Act also provides a new credit for previously owned clean vehicles to qualified buyers. The maximum credit is either $4,000 or 30% of the sales price of the vehicle—whichever is lower. So if the vehicle’s cost is more than $13,333.33, the taxpayer will get the full $4,000 credit. But if the vehicle’s cost is above $25,000, the buyer is no longer eligible.

A qualified buyer in this context is an individual who purchases the vehicle for use and not for resale, isn’t a dependent of another taxpayer (regardless of whether the other taxpayer claims the dependency exemption) and hasn’t been allowed a credit for a used clean vehicle during the three-year period ending on the sale date, under Section 25E(c)(3).

A previously owned vehicle is defined as a vehicle with a model year that is at least two years earlier than the calendar year in which the taxpayer acquires it. The vehicle also must have been used by someone else. The vehicle still must meet the same domestic mineral and battery components as the new clean vehicle credit and be manufactured in North America.

As a result, it could be some years before taxpayers can benefit from previously owned vehicle credit. They must meet the following modified adjusted gross income thresholds to claim the previously owned vehicle credit: $150,000 for married filing joint, $112,500 for head of household, and $75,000 for all others.

The Department of the Treasury is expected to provide additional guidance on definitions and requirements for the credits. This is an area to watch so you’re prepared to answer your clients’ questions regarding their clean vehicle purchases in 2023 and beyond.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Misty Erickson is a tax content manager for the National Association of Tax Professionals. She has worked in the tax profession for more than 17 years.

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