How Does the Electric Car Tax Credit Work?

The electric vehicle (EV) tax credit is a federal incentive that reduces the tax liability for individuals purchasing qualifying electric or plug-in hybrid vehicles. As a nonrefundable credit, it lowers the amount of federal tax owed but does not result in a refund if the credit exceeds the tax liability. Beginning in 2024, consumers have the option to transfer the clean vehicle credit to a qualified dealer, allowing for an immediate discount at the time of purchase.

Who Qualifies for the Electric Car Tax Credit

Under the old system, consumers who bought a qualifying EV or plug-in hybrid electric vehicle (PHEV) from a manufacturer that had sold fewer than 200,000 EVs or PHEVs were eligible for a tax credit of up to $7,500. However, the new system introduced in recent years is more complex, featuring several additional requirements:

Income Limit

To qualify for the federal EV tax credit, buyers must have a modified adjusted gross income (MAGI) below specific thresholds:

• New EVs:
  • Single and married filing separately: $150,000.
  • Head of household: $225,000.
  • Married filing jointly: $300,000.
• Used EVs:
  • Single and married filing separately: $75,000.
  • Head of household: $112,500.
  • Married filing jointly: $150,000.

A useful feature is that you can use your MAGI from either the year the car is delivered or the year before delivery. This flexibility can help buyers qualify for the credit even if their income exceeds the threshold in one of the two years.

Price Caps

The program sets maximum manufacturer’s suggested retail prices (MSRP) for eligible vehicles:

• Vans, SUVs, and pickup trucks: $80,000 or less.
• Sedans and passenger cars: $55,000 or less.
• Used vehicles: $25,000 or less.

For new vehicles, the MSRP includes the base retail price plus the price of accessories or optional equipment present on the car at delivery. Taxes and dealer-added fees are not included in the MSRP.

Battery Component Regulations

Electric vehicles must meet specific regulations regarding the sourcing and assembly of their battery components. These regulations are designed to encourage the use of domestically sourced or free trade agreement country-sourced materials, thereby supporting North American manufacturing and supply chains. Here's a breakdown of these requirements:

North American Assembly and Manufacturing Percentages

To be eligible for up to $3,750 of the federal tax credit, a specific portion of the vehicle's battery must be assembled or produced within North America. The required percentages will increase over time, as follows:

• 2023: 50%
• 2024: 60%
• 2025: 60%
• 2026: 70%
• 2027: 80%
• 2028: 90%
• 2029 through 2032: 100%

These percentages ensure a growing reliance on North American battery manufacturing and assembly as the market matures.

Critical Minerals Requirement

To qualify for the remaining $3,750 of the tax credit, vehicles must meet a "critical minerals requirement." This means a certain amount of the essential minerals used in the battery must come from the U.S. or a country with a trade agreement with the U.S. The required percentages for critical minerals will also increase over time:

• 2023: 40%
• 2024: 50%
• 2025: 60%
• 2026: 70%
• 2027 through 2032: 80%

Final Assembly Location

Image courtesy of Business Insider

All vehicles must undergo their final assembly in North America to qualify for tax credits. This rule ensures that domestic and certain foreign automakers with regional production facilities can benefit from the tax credit program. Here’s a detailed look at how this requirement affects different manufacturers and models:

Qualifying Vehicles with North American Assembly

Some examples of vehicles that meet the North American final assembly requirement include:

• Ford F-150 Lightning (electric pickup)
• Lincoln Corsair Grand Touring (PHEV)
• Jeep Grand Cherokee 4xe (PHEV)
• Chrysler Pacifica Hybrid (PHEV built in Canada)
• Ford Mustang Mach-E (assembled in Mexico)

These vehicles must also comply with other statutory requirements to qualify for the tax credit.

Foreign Automakers with North American Production

Several foreign automakers have established or shifted production to North America to qualify for the tax credit:

• Nissan Leaf: Made in Smyrna, Tennessee.
• Volvo S60 Recharge: Produced in South Carolina.
• Volkswagen ID.4: Production moved to Chattanooga, Tennessee from outside the U.S.

The IRS uses the vehicle identification number (VIN) to determine the country of origin for final assembly, ensuring compliance with the tax credit requirements.

Non-Qualifying Vehicles

Automakers that solely manufacture their EVs outside of North America do not qualify for the tax credit under the current rules. This restriction affects brands like:

• Kia
• Hyundai
• Genesis
• Audi
• Porsche
• Subaru

The new assembly requirement has prompted some foreign automakers to announce plans to develop or accelerate North American EV production. This move indicates the law is having its intended effect of boosting local manufacturing. However, the European Union and Korea have indicated plans to challenge the new rules, claiming they break international trade agreements.

Vehicle Eligibility

Image courtesy of Cadillac

As of July 2024, several fully electric and plug-in hybrid vehicles are eligible for either a full or partial tax credit. The Internal Revenue Service (IRS) recommends using the FuelEconomy.gov website to check the most up-to-date list of eligible models. Some key models and their corresponding tax credits and MSRP limits include:

• Acura ZDX (2024): $7,500 credit, MSRP limit $80,000.
• Cadillac LYRIQ (2024): $7,500 credit, MSRP limit $80,000.
• Chevrolet Blazer (2024): $7,500 credit, MSRP limit $80,000.
• Tesla Model 3 Long Range AWD (2024): $7,500 credit, MSRP limit $55,000.
• Volkswagen ID.4 (2023-2024): $7,500 credit, MSRP limit $80,000.

Charging Equipment and Compatibility

When considering vehicle eligibility for the tax credit, it's also essential to understand the charging infrastructure required for your EV. There are two main types of chargers:

• Level 1 Chargers - standard chargers that come with most electric vehicles. They can be plugged into a typical household outlet (120 volts) and are ideal for overnight charging at home. However, they are slower, often taking up to 24 hours to fully charge a vehicle.
• Level 2 Chargers - require a 240-volt outlet, similar to those used by household appliances like dryers. Level 2 chargers significantly reduce charging time, often taking 4-8 hours for a full charge. They are a popular choice for home installation and are also widely available at public charging stations.

EV Adapters and J1772 Connectors

Most electric vehicles in North America use the J1772 chargers for Level 1 and Level 2 charging. This standard ensures compatibility across different EV models and charging stations. Additionally, many electric vehicle come with EV adapters that allow them to connect to various charging infrastructure, enhancing flexibility and convenience for drivers.

By understanding the compatibility and requirements of charging equipment, you can ensure your vehicle remains eligible for the tax credit while also optimizing your charging efficiency.

Business Vehicle Credits

For businesses, there is a separate commercial vehicle tax credit they can avail. Businesses can receive up to $7,500 for light vehicles and up to $40,000 maximum credit for larger vehicles such as delivery trucks. The commercial tax credit has fewer restrictions compared to the consumer EV tax credit.

Image courtesy of Canoo

There are no specific price caps on the vehicles to qualify for the commercial tax credit, and there are no stringent sourcing requirements for the battery components or assembly location. The primary condition is that the vehicle must be used for business purposes. The exact amount of the commercial tax credit depends on the purchase price of the vehicle. Businesses should refer to detailed guidelines provided by the IRS for more information on how to calculate the eligible credit.

How to Claim the Credit

To claim the federal tax credits, individuals are required to submit Form 8936 along with their federal income tax return. Here are the key points to remember:

1. Nonrefundable Credit: The credit can reduce or eliminate your tax liability but will not result in a refund if the credit amount exceeds your tax due. Excess credit cannot be carried over to future tax years.

2. Claim Year: The credit is typically claimed for the tax year the vehicle was delivered, not necessarily the year it was purchased. For instance, if you purchased an eligible EV in 2023 but received it in 2024, you should claim the tax credit on your 2024 tax return, which is filed in 2025.

Transferring the Credit to a Dealer

If you transfer the credit to the dealership at the time of purchase, you get an immediate discount on the car price. However, you must still report this transaction on your tax return by filing Form 8936 and providing the vehicle identification number (VIN). If you accept a rebate but are ineligible for it, you must repay the IRS.

Necessary Documentation

When purchasing an EV, ensure you receive a report from the seller containing the following information:

• Seller's name and taxpayer identification number (TIN).
• Buyer's name and TIN.
• Date of sale and sales price.
• Verification of the maximum eligible tax credit.
• VIN and battery capacity of the vehicle.
• Verification that you are the original user of the vehicle.
• A declaration statement from the seller under penalty of perjury.

Transferring Credit to Dealer

If transferring the credit to the dealer for a discount:

• Provide your taxpayer identification number (typically your Social Security number) and a photo ID.
• Confirm that your modified adjusted gross income (MAGI) falls within the eligibility threshold.
• Acknowledge that you must repay any rebate amount if your MAGI exceeds the limit.
• Confirm the car is for personal use.
• Commit to filing a tax return for the purchase year and providing the VIN and transfer date to the IRS.
• Elect to transfer the credit voluntarily.

Additional Rebates and Incentives

Apart from the federal EV tax credits, be aware of additional state and local incentives:

• California: The Clean Air Vehicle program provides carpool lane access to select EVs.
• New York: Offers a state rebate of up to $2,000 in addition to the federal tax credit.

Some states may have restrictions on claiming multiple incentives, so ensure you understand the rules to avoid issues with "double-dipping."

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