New Tax Credits for Electric Vehicles

You could get money back when you buy a new or used EV, but price, income and other restrictions apply

a red electric SUV is on display at an auto show

Bloomberg / Getty Images

John Waggoner,

AARP

En español

Published August 23, 2022

The Inflation Reduction Act isn’t just about cutting the cost of prescription drugs. The new law, signed Aug. 16, also offers tax credits of up to $7,500 for those who buy an electric vehicle (EV) in the next 10 years, starting in 2023.

The good news doesn’t end with new cars. The law also allows a credit for used EVs purchased from dealers, starting in 2024. The credit is equal to the lesser of 30 percent of the sale price or $4,000. The sale price can’t be more than $25,000, and the EV must be at least two years old.

Unlike tax deductions, which reduce your taxable income, tax credits reduce your bill dollar for dollar. If you owe $8,000 in taxes and get a $7,500 tax credit, your tax bill shrinks to $500. However, the EVs will only reduce your tax bill to zero; if you owe $6,000 and get a $7,500 credit, you won’t get a check from the Internal Revenue Service for the $1,500 difference. And you can’t carry unused credits forward into the next tax year.

Plenty of strings attached

The EV tax credits are aimed at lower-cost EVs. The credit can only be claimed on trucks, vans and SUVs that cost $80,000 or less, and other vehicles including sedans that cost $55,000 or less.

High-income buyers are excluded, too. To qualify for the new-EV tax credit, a single filer must have income below $150,000. Married couples filing jointly must have income of less than $300,000. For the used-EV tax credit, the income limits are lower: $75,000 for single filers and $150,000 for couples.

The tax credit is actually two tax credits, each worth $3,750. The first credit is for EVs that are assembled in North America — the U.S., Mexico and Canada. The other credit is for EVs whose batteries contain materials sourced in North America. If you’d like to find out where your car was assembled, it’s in your car’s vehicle identification number (VIN). A VIN beginning with a 1, 4 or 5 indicates that the vehicle was assembled in the United States; a VIN beginning with a 2 indicates it was assembled in Canada; a VIN beginning with a 3 indicates the vehicle was made in Mexico.

The second $3,750 credit has to do with the EV’s battery — specifically, whether critical minerals in the battery come from the U.S. or from countries with which the U.S. has trade agreements. The key critical minerals commonly used in EV batteries are lithium, cobalt, nickel, graphite and manganese. In 2023, the minimum amount of U.S.-sourced critical materials can be as low as 40 percent. The minimum rises by 10 percentage points each year until it reaches 80 percent in 2027. Starting in 2024, vehicles cannot have any battery components sourced from a “foreign entity of concern,” which includes China.

All of these provisions greatly limit the number of EVs available for the tax credit. “Most current vehicles probably will not qualify,” says Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. Among the 31 cars that may qualify as being assembled in North America are the Ford F-150 Lightning, the Nissan Leaf, and the GMC Hummer Pickup.

Taking the EV tax credit

You’ll have to claim your EV tax credit when you file your federal tax return. Be sure to get a letter of certification from the dealer so that it can be forwarded to the IRS when you claim the credit on your return, according to Anderson Advisors, a business planning and consulting firm. The letter should specify the vehicle’s make, model and the tax year that it qualifies for the EV tax credit.

Starting in 2024, you may be able to get the credit through your dealer when you buy the car, rather than waiting for a tax return to roll in. “I think they need another year to figure out how to do this,” Luscombe says. “One of the issues is the dealer would have to be able to, in some way, to determine whether the customer is eligible for the credit based on their income.”

The credit for buying an EV doesn’t rule out other credits and deductions you might be entitled to. For example, if you are self-employed and use your car for business, you’re still entitled to tax breaks relating to mileage and depreciation.

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