It's about to become harder to get the full $7,500 tax credit on a new electric vehicle, but it's still possible depending on the car and where you live. Here's everything you need to know to maximize your cash back.
I write about money. I’ve been reviewing tax software and services as a freelancer for PCMag since 1993. Along the way, I took on reviews of other types of business and personal finance technology. Prior to that, I had spent a few years writing about productivity and entertainment applications for 8-bit personal computers (my first one was a Commodore VIC-20) as a member of the editorial staff at Compute!
Tax credits for electric vehicles (EVs) aren't new, but they're becoming more relevant and of interest to more people with the rise in adoption of EVs in the US. Thanks to recent legislation by Congress and President Biden related to tax credits and other provisions, some of the stumbling blocks that have held back EVs—like price, driving range, battery charging time, and access to charging stations—are starting to fall away. The new legislation commits support and a lot of money to the expansion of the EV market, though once the act is signed into law, it will also make the tax credits harder to get.
According to Bloomberg, the US has finally reached a tipping point in the adoption of EVs. For the first six months of 2022, cars powered solely by electricity represented 5% of all new cars sold.(Opens in a new window) Throw in plug-in hybrids (PHEVs), and we may reach 10% later this year.
Though related tax benefits have been included in earlier legislation, the Inflation Reduction Act of 2022, a slimmed-down version of the Build Back Better Act, has been passed by the Senate and is likely to pass the House and be signed into law by President Biden as early as this week. Some legislators are calling it the most significant piece of climate change legislation ever passed.
Income tax credits for EVs came into the picture in 2008 and remain in force today. Internal Revenue Code (IRC) Section 30D provides a credit for qualified EVs or PHEVs acquired after December 31, 2009. Here is the IRS's list of the eligible vehicles(Opens in a new window) and their corresponding tax credits. To claim the credit, report an eligible EV purchase on IRS Form 8936 when you fill out your tax return.
The credits range from $2,500 to $7,500, depending on the capacity of the battery. Generally speaking, the more battery power, the larger the credit.
The credit is nonrefundable, meaning you can only claim as much as you owe in federal income taxes for the year you claim the credit (which must be the year you purchase and start using the vehicle). For example, if you only owe $6,000 in taxes, the most you can get as a credit is $6,000, even if your vehicle is eligible for the full $7,500. The credit doesn't roll over, either. Another caveat: The IRS always has the right to reject a given credit or reduce it.
After that original legislation passed...crickets. There hadn't been new legislation related to that original $7,500 credit—until now.
In November 2021, President Biden signed the $1.2 trillion bipartisan Infrastructure Investment and Jobs Act (IIJA). It doesn't increase the maximum $7,500 tax credit, but it contains provisions that are at least as important as tax credit to EV buyers. Those provisions include $7.5 billion for EV charging infrastructure and more than $7 billion for the critical minerals supply chains need for for batteries, components, materials, and recycling.
The Act also empowers private industry, making investment commitments of more than $100 billion designed to make more EVs and their parts in the US, create jobs for auto workers, and strengthen domestic supply chains. Numerous government departments announced programs and initiatives (and funding) to support the Act's goals. For example, the Department of Energy introduced its EVs4ALL program(Opens in a new window) ($45 million) to develop batteries that charge very quickly to complement the rollout of the public charging network.
Then in August of 2022, Congress passed the Inflation Reduction Act.
The Inflation Reduction Act of 2022, which, as mentioned, is expected to be signed soon by President Biden, contains tax breaks for buyers of EVs. It extends the existing $7,500 tax credit for the purchase of EVs. (Congress tried to bump the credit up to $12,500 in the Build Back Better Act, but that increase never made it out of Congress.) Whether buyers will be eligible for the full credit depends on where the battery materials are made.
And that will make it very difficult to get that full $7,500, more difficult than it even was before.
To get the first half ($3,750) of the full tax credit, a percentage of the vehicle's battery materials (like lithium and nickel) need to be processed or extracted either in the US or in a country with which the US has a free trade agreement. In 2023, that percentage of battery materials will be 40%. It goes up to 80% in 2027.
To qualify for the other half (an additional $3,750) of the credit, the vehicle purchased must have the majority of its battery components made in the US, Canada, or Mexico. In 2023, the required percentage will be 50%, increasing to 100% by 2029. The credit will sunset on December 31, 2032.
The problem is that most of the world's mineral refining and battery component production is done in China and other countries with which the US does not have free trade agreements. And there are a lot of political(Opens in a new window) and environmental risks(Opens in a new window) to ramping up those activities in the US. Some legislators, especially Senator Joe Manchin, want the US to expand its mineral mining so as not to be so dependent on foreign countries for raw battery materials.
Congress has a few proposed solutions to the issue of where batteries and their parts for electric vehicles come from. The IIJA contains provisions (money) that would address the supply chain issues related to lithium-ion batteries. Further, it calls for the identification, production, recycling, and reuse of critical minerals. And it supports manufacturers who want to build facilities for energy production in communities where coal mines or coal power plants have closed.
With the Inflation Reduction Act, the name of the EV tax credit will be changed to the "clean vehicle credit." This means that fuel cell vehicles (FCVs) should qualify, as long as they are assembled in North America. FCVs are considered zero-emission vehicles because they utilize oxygen from the air along with compressed hydrogen.
Fuel cells have been used in a variety of vehicles, some for commercial applications (like forklifts), although Hyundai, Toyota, and Honda produce passenger vehicles using this technology, too. A dearth of hydrogen fueling stations and other logistical problems may prevent FCVs from fully taking hold as personal vehicles, however. The credit for commercial fuel cell vehicles maxes out at 30% of the cost or $40,000, whichever is less, and will remain in place until 2032.
There's a different credit included in the Act for purchasing used electric vehicles. You could get up to a $4,000 credit or 30% of the sale price, whichever is less. And the amount of the credit phases out based on your adjusted gross income (AGI). If your AGI is more than $150,000 for couple filing jointly, $112.500 for head or household, or $75,000 for all others, then the amount of tax credit you get is reduced. The credit is slated to end in 2032.
If you lease an EV from a dealership, the credit goes to the dealership, although the dealership may in turn cut you a break so you can take at least partial advantage of it.
Full tax credit eligibility for more EVs. In the current system, the full EV tax credit isn't available if you buy a car from a manufacturer that has sold more than 200,000 EVs, but that will change with the Inflation Reduction Act. In other words, before the act is signed into law, you're not eligible for the full $7,500 if you buy a Tesla or General Motors vehicle, but after it's signed, you will be.
Higher income limits to receive the full tax credit. EV tax credits start to phase out at AGIs of $300,000 (married filing jointly), $225,000 (head of household), and $150,000 (all others).
Price limits. You can't get the credit for buying a sedan that costs more than $55,000 or an SUV ("light truck") or pickup truck that costs more than $80,000.
Commercial EVs. As with fuel cell vehicles, the credit for commercial-use EVs could be as much as 30% of the vehicle's cost or $40,000.
Yes. Hundreds of them. Retailers in most states offer a combination of tax credits, rebates, and reduced vehicle taxes or registration fees. The Department of Energy maintains a list of them by state(Opens in a new window) . Check out this list for more current additions(Opens in a new window) as well as new state laws and regulations. But here are some examples.
California, for example, offers the Electric Vehicle Program. This is a point-of-sale rebate of up to $750 for the purchase or lease of a new EV or PHEV through the Clean Fuel Reward Program. To qualify, the vehicle must have a minimum battery capacity of 5 kilowatt-hours and be purchased from a participating retailer.
Also in California, The Clean Vehicle Rebate Project offers rebates of up to $4,500 for FCEVs, $2,000 for EVs, $1,000 for PHEVs, and $750 for zero-emission motorcycles to individuals who either buy or lease. Eligibility is based partly on annual gross income, and the rebates are first come, first served.
If you buy or convert a light-duty EV in Colorado, you may be eligible for a $2,500 tax credit ($1,500 for leasing) in 2022. Credits are also available for light-duty, medium-duty, and heavy-duty electric trucks, ranging from $3,500–$10,000.
The Illinois Environmental Protection Agency (IEPA) offers rebates to residents who purchase or lease a new or pre-owned EV. The rebate is up to $4,000 through June 30, 2026.
New York's Electric Vehicle (EV) Rebate Program provides rebates of up to $2,000 for the purchase or lease of a new eligible EV.
Connecticut, Massachusetts, New Jersey, and other states are also offering significant rebates or tax credits. But be sure to read all the eligibility requirements before you buy a new EV, PHEV, or FCEV.
Car and Driver published a guide(Opens in a new window) to EVs expected to be available within the next five years that are in stages ranging from concept to production. Some may never be made.
Even if they're built, how quickly will consumers buy them? Many futurists envision charging stations will be as ubiquitous as Speedways and gas-powered vehicles as extinct as the ancient life forms that morphed into their fuel. Their predictions for exactly when this might occur are less certain.
There are plenty of reasons an all-electric world would be beneficial for the planet and for the health of its inhabitants. According to a recent Pew Research Center survey(Opens in a new window) , that's the number-one reason Americans would consider buying an EV.
Oddly, though the majority of survey respondents supported the use of incentives like tax credits to encourage use of EVs and PHEVs, fewer than half (42%) "would be very or somewhat likely to seriously consider purchasing an electric vehicle the next time they're looking for a new car or truck."
For more advice on electric vehicles, see our list of the best EVs in 2022.
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I write about money. I’ve been reviewing tax software and services as a freelancer for PCMag since 1993. Along the way, I took on reviews of other types of business and personal finance technology. Prior to that, I had spent a few years writing about productivity and entertainment applications for 8-bit personal computers (my first one was a Commodore VIC-20) as a member of the editorial staff at Compute!
After working at Lawson Associates, now Lawson Software, I switched my focus to accounting but learned that personal computer applications were more progressive and interesting to cover than mainframe solutions. So I served as editor of a monthly newsletter that provided support for accountants who were just starting to use PCs. I still ghostwrite monthly how-to columns for accounting professionals. From there, I went on to write articles and reviews for numerous business and financial publications, including Barron’s and Kiplinger’s Personal Finance Magazine.
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