Federal Tax Credit for Electric Cars - Updated for 2023
There's more to the federal tax credit for electric cars than just a potential $7,500 rebate. Here are the basics, with updated information for new more stringent requirements.
Originally published March 4, 2022, updated April 18, 2023.
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If you're considering buying an electric vehicle (EV), the federal tax credit for EVs could save you money. This credit, called the Qualified Plug-In Electric Drive Motor Vehicle Credit, can provide a potential federal income tax credit of up to $7,500.
To be eligible, you must ensure the car you buy qualifies, your income qualifies, and your tax status allows you to benefit from the credit before you purchase a vehicle. Otherwise, you may not get the credit you were expecting.
How Does the Federal Tax Credit for Electric Cars Work?
The federal tax credit for buying a qualifying car could potentially save you thousands. You calculate the credit amount based on a qualifying car's battery component requirement and critical minerals requirement. Both requirements represent a $3,750 credit, and together a qualified vehicle can be eligible for up to $7,500. If the car qualifies for only one part, but is otherwise eligible, it can qualify for a $3,750 credit. MSRP for eligible vehicles is capped at $80,000 for trucks, vans, and SUVs, and $55,000 for all other vehicles.
The tax credit is not refundable, which means you must have federal tax due to take advantage of it. If your tax due is less than the credit amount, you can only claim the credit up to the amount of your tax due. You cannot use excess amounts of the credit on future- or previous-year tax returns.
The credit is non-refundable, meaning you must have a tax due as calculated from your taxable income reported on your tax return, after accounting for other tax credits. Payments from federal tax withholding from your paycheck and estimated tax payments go toward paying this tax liability and may get refunded to you.
What Cars Qualify?
Just because a car has a battery doesn't mean it qualifies for the federal tax credit for electric cars. The car must plug into an electrical source to charge the battery and must have a battery capacity of a minimum of 7 kWh to qualify. These requirements exclude popular traditional hybrid vehicles that charge their batteries while driving, without plugging into an electricity source.
When the Inflation Reduction Act was signed into law on August 16, 2022 it immediately added a requirement that the vehicle's final assembly must be in North America to qualify for the credit under the existing rules. The bill included more stringent criteria surrounding location of battery component final assembly and source of the critical minerals inside the battery packs, which went into effect on April 18, 2023. When the battery component and critical minerals requirements were applied many previously eligible vehicles no longer qualified for the credit. The percentages for each criteria are scheduled to increase annually.
Manufacturer suggested retail price is also capped at $80,000 for vans, SUVs, and pickup trucks and $55,000 for other vehicles.
You can view a full list of currently qualifying cars on the Internal Revenue Service’s
Who Qualifies for the Credit
The Inflation Reduction Act also introduced an income cap for purchasers. Income thresholds are capped at $300,000 for people who file joint tax returns, $225,000 for those who file as head of household, and $150,000 for others for the year of purchase. Dependents do not qualify for the tax credit.
Leasing Loophole
One notable loophole exists for those who lease a qualified vehicle. The IRS has interpreted part of the new law to exempt leases from most of the criteria placed on purchases. Though EVs assembled outside of North America — for example, in Europe or Korea — are ineligible for the credit if purchased, they may be eligible if leased. Vehicles under 14,000 pounds with a battery capacity of 7 kWh or more (or 15 kWh if they weigh more) are eligible simply if they are made by a qualified manufacturer, recharge externally, or are a qualified fuel-cell vehicle. There is no MSRP limit on the vehicle, and no income limits for buyers.
Though a much wider number of vehicles qualify when leased, the company offering the lease is free to pass that savings along to consumers, or not. A number of companies include the credit on the front end of the lease, reducing the capitalized cost accordingly. Check on the automaker's website for lease terms or inquire at a dealership to confirm if a vehicle qualifies and if a credit will be issued.
Used Cars Qualify Now, Too
Used cars became eligible for a reduced federal tax credit starting January 1, 2023. Used EVs purchased from a dealership for less than $25,000, that are at least two years old, can qualify for a maximum of $4,000. Notably, it can't be claimed by a lessee purchasing their leased vehicle after maturity, and the credit can only be claimed once in the vehicle's life. The EV must have a 7 kWh battery and be capable of being recharged from an external source of electricity.
Buyers can only claim the incentive once every three years, and are capped at income limits of $150,000 for people who file joint tax returns, $112,500 for head of household, and $75,000 for others for the year of purchase. Like the new vehicle credit, dependents do not qualify.
Understanding How and When You Get the Credit
Before purchasing a qualified electric vehicle, it's important to evaluate your personal needs to make sure an electric vehicle fits your lifestyle. You do not get to take advantage of the tax credit and associated monetary benefit when buying a qualifying vehicle. Instead, you claim the credit when you file your federal income tax return by filing Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit. Your tax preparer or tax preparation software should fill this form out for you as long as you provide the necessary information.
