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Jul 23, 2023

New EV Tax Credit 2023 Rules: Everything You Need To Know

The new $7,500 EV federal tax credit can be complicated for buyers and manufacturers. Here's what you should know. A new federal EV tax credit for 2023 is here, thanks to the Inflation Reduction Act

The new $7,500 EV federal tax credit can be complicated for buyers and manufacturers. Here's what you should know.

A new federal EV tax credit for 2023 is here, thanks to the Inflation Reduction Act (IRA) — massive tax and climate legislation promoting clean energy. The credit of up to $7,500 for certain electric vehicles, called “clean vehicles,” is supposed to encourage more people to use EVs. However, a year has passed since the IRA was enacted, and there are still many questions about how the EV tax credit works.

Despite the confusion, electric vehicle tax credits can benefit some consumers. So, here is some information to help you navigate the latest EV credit rule changes for 2023 and better understand which vehicles do (and don’t) qualify — and why.

And, of course, if you’re eligible, you need to know to claim the EV credit when you file your federal income tax return with the IRS. Read on for some answers.

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Here are some of the key points to know about the federal electric vehicle tax credit.

Key points

However, one of the most important points is that there are income limits for the clean vehicle tax break. Here’s what you need to know.

Your modified adjusted gross income (MAGI) is used for the following income limits, which apply to qualifying new clean vehicles. (MAGI, found on Line 11 of Form 1040, often determines your eligibility for various tax breaks and is generally your adjusted gross income (AGI) with certain deductions or income exclusion added.)

When claiming the EV credit, the IRS says that you can use the lesser of your MAGI in the year you take delivery of your EV or your MAGI from the year before you took delivery of the vehicle.

Income limits for new qualifying electric vehicles

You won't qualify for the EV tax credit if you are single and your modified adjusted gross income exceeds $150,000.

The EV tax credit income limit for married couples filing jointly is $300,000.

And, if you file as head of household and make more than $225,000, you also won’t be able to claim the electric vehicle tax credit.

The EV credit income limit is $150,000 for all other filing statuses.

Qualifications and income limits for previously owned eligible EVs

You must meet the following criteria to qualify for the federal EV tax credit for eligible used/previously owned clean vehicles.

Additionally, for the EV tax credit for used vehicles, the IRS says your MAGI cannot exceed the following income limits.

*You can use your MAGI from the year you took delivery of the vehicle or the year before, whichever is less.

Once you know if you’re income-eligible to claim the electric vehicle tax credit, a big question on EV buyers’ minds is which vehicles qualify. The short answer is that very few models currently qualify for the full $7,500 electric vehicle tax credit. Others qualify for half that amount, and some don’t qualify at all. The reason is stricter rules adopted on April 18 that limited the credit depending on whether a vehicle meets battery and sourcing requirements.

But first, price limits determine whether a vehicle is eligible for a tax credit.

EV credit vehicle price limits for new vehicles

Note: “Used” or “previously owned” for the EV tax credit purposes means that the car is at least two years old.

Which vehicles are considered SUVs? More clarity was needed over which vehicles were classified as SUVs for the $80,000 price limit. Treasury and IRS released guidance saying they will use criteria based on the Environmental Protection Agency’s (EPA) Fuel Economy Labeling Standard to determine whether a vehicle is a car or an SUV. Some SUVs are eligible for EV tax credits for automakers and consumers where they weren't previously.

The new guidance on SUV classification is retroactive to Jan. 1, 2023. So, if you took possession of your EV in January of this year, you can use the new classification to determine whether your purchased vehicle is eligible for the tax credit.

More from Kiplinger Does Your Favorite SUV EV Qualify for a Tax Credit?

Price limits for previously owned EVs

A used/previously owned electric vehicle must meet the following requirements to qualify for the up to $4,000 federal EV tax credit.

To see if a vehicle is eligible for the used clean vehicle credit, visit the federal fueleconomy.gov website.

Battery and sourcing requirements

Another piece of the puzzle with vehicle eligibility deals with battery and sourcing requirements.

IRS guidance released earlier this year limits the number of EVs that qualify for the full $7,500 EV tax credit. The new 2023 EV tax credit rules address requirements for critical mineral and battery component requirements for electric vehicles and will be finalized later this year. But they are effective for EVs placed into service after April 17, 2023.

As a result, an electric vehicle that qualified for the up to $7,500 tax credit on April 17 might, as of April 18, qualify for only half the tax credit amount, or perhaps, no EV tax credit at all.

“Treasury is taking an important step that will help consumers save up to $7,500 on a new clean vehicle and hundreds of dollars per year on gas,” Treasury Secretary Janet Yellen said in a statement about the stricter EV credit rules.

Only a few EVs currently qualify for the full $7,500 tax credit. Some electric vehicles that don’t qualify include about nine models from mainly foreign manufacturers like Hyundai, Volkswagen, BMW, Rivian, Nissan, and Volvo.

Tesla models, like the Model Y and all Model 3 versions, are eligible for the full $7,500 EV credit. (This is a recent change.) Some Tesla models (Model Y and Model 3 Performance) were previously listed on the IRS website as eligible for the full $7,500 federal EV tax credit.

Earlier this summer, Tesla announced that all new Tesla Model 3 versions are currently eligible for the full $7,500 EV tax credit for eligible buyers. (Tesla also reduced the starting price of its Model 3.)

The federal government later confirmed that Tesla Model 3 vehicles qualify for the full $7,500 federal EV tax credit through an update to a list of qualifying vehicles on the fueleconomy.gov website. However, it’s unclear what changes Tesla made to meet the battery and mineral sourcing requirements for the full credit and whether the qualification will remain in place after December 31. So, stay tuned.

You can find the complete list of vehicles qualifying for the credit on the federal fueleconomy.gov website.

The Department of Transportation also has a tool on its website to enter the vehicle identification number (VIN) of the electric vehicle you're interested in to determine its eligibility for the EV tax credit. This guidance might help you decide when it’s best (tax-wise) to buy an EV.

What else can you do? Double-check the list of qualifying clean vehicles if you’re in the market for a new or used EV. You can also look at the IRS’ FAQ Fact Sheet for the clean vehicle tax credit.

Also, remember that next year (i.e., in 2024), the EV tax credit rules could change again. Part of the reason is political controversy in Congress surrounding the EV tax credit and concerns from overseas manufacturers about vehicles not qualifying for the tax break.

Another new rule coming soon. If you’re buying a clean vehicle, you will have the option, beginning in 2024, to take the EV tax credit as a discount when you purchase the vehicle. Essentially, you would be transferring the credit to the dealer, who could lower the vehicle price by the amount of the credit. This means you won’t have to wait until it’s time to file your tax return to benefit from the electric vehicle tax credit.

To claim the EV tax credit, you file IRS Form 8936 with your federal income tax return. You’ll need the VIN (vehicle identification number) for your electric vehicle to complete the form. Form 8936 is used to determine your tax credit for qualified two- or three-wheeled plugin electric vehicles.

But what if you haven’t filed your 2022 federal income tax return yet? (Many taxpayers in several states received more time to file their returns due to severe storms and natural disasters.)

How to get the EV credit on vehicles bought last year

The following guidelines apply to EV buyers who had written, binding sales contracts from last year to purchase EVs that will be placed in service (which means “delivered”) on or after the IRA became effective.

There is a tax credit available for leased electric vehicles. But there’s also a “catch.” The tax credit belongs to the lessor, not to you, the lessee.

Under the IRA, leased electric vehicles are classified as "commercial vehicles," making them eligible for the entire federal clean vehicle credit without meeting strict battery and sourcing requirements. That means you could have a more comprehensive selection of electric vehicles to save money if the dealer agrees to pass any tax credit savings on to you.

However, remember that the lessor receives the tax credit (not you). So, savings you receive, if any, would be a rebate or reduced lease price.

More from Kiplinger Leasing an EV? There's a Tax Credit 'Loophole' for That

If you're in the market for an EV home charger, the IRA revives a credit for electric vehicle chargers that previously expired two years ago. The "Alternative Fuel Refueling Property tax credit" is extended for 10 years — through Dec. 31, 2032.

For more information on the federal tax credit for electric vehicle chargers, see Kiplinger's guide to the federal EV charger tax credit.

The IRA contains billions of dollars in tax credits and incentives, not just for eligible electric vehicles. There’s a tax break for numerous green home improvements, like installing home solar panels.

More from Kiplinger on Federal Engery Tax Credits

As the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist.

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