The Clean Vehicle Tax Credit is a federal incentive designed to promote sustainability by making electric and alternative fuel vehicles more accessible. As of 2023, you can claim up to $7,500 in tax credits for qualifying new vehicles and up to $4,000 for eligible used clean vehicles.
However, recent changes have introduced stricter eligibility rules, including income limits, vehicle price caps, and domestic manufacturing requirements. In this blog, we break down everything you need to know to maximize your tax savings.
Key Changes in 2023 and Beyond
Criteria updates, introduced in 2023, aim to boost domestic manufacturing, support middle-income buyers, and ensure tax incentives are targeted effectively. Thus, the credit amount varies based on:
- The vehicle’s battery capacity and compliance with domestic manufacturing requirements (you get more for meeting both the critical minerals and battery component requirements – $3,750 each, totaling up to $7,500).
- Your adjusted gross income (AGI) eligibility (the higher the AGI, the less likely you qualify due to new income limits).
- The vehicle’s price, type, and manufacturer qualifications (including strict MSRP limits and North American assembly requirements).
Income Limits for Eligibility
To claim the new vehicle credit, your adjusted gross income (AGI) must be below the following thresholds for either the current or prior tax year:
- $300,000 or less for joint filers and surviving spouses.
- $225,000 or less for head of household filers.
- $150,000 or less for single filers.
For used clean vehicles, the AGI limits are lower:
- $150,000 or less for joint filers and surviving spouses.
- $112,500 or less for head of household filers.
- $75,000 or less for single filers
Additionally, used vehicle buyers cannot have claimed this credit in the past three years (first eligible year: 2023).
Vehicle Price Caps
To prevent tax credits from subsidizing luxury EV purchases, the IRS set maximum price limits based on the Manufacturer’s Suggested Retail Price (MSRP):
- $80,000 for SUVs, vans, and pickup trucks.
- $55,000 for sedans and other vehicles.
Important: The MSRP includes optional features – if add-ons push the price above the cap, the vehicle becomes ineligible.
Domestic Manufacturing Requirements
To qualify, vehicles must be assembled in North America and meet battery sourcing rules, which focus on:
- Critical minerals: A required percentage of minerals that must be extracted or processed in the U.S. (or a trade partner country) starts at 40% in 2023 and increases annually:
- 2023: 40%
- 2024: 50%
- 2025: 60%
- 2026: 70%
- 2027+: 80%
- Battery components: The percentage of battery components that must be manufactured or assembled in North America follows a similar ramp-up:
- 2023: 50%
- 2024-2025: 60%
- 2026: 70%
- 2027: 80%
- 2028: 90%
- 2029+: 100%
Partial Credit: Vehicles that meet only one of the two battery requirements (either the critical minerals or battery components rule) qualify for a $3,750 credit. Vehicles that meet both requirements qualify for the full $7,500 credit.
Expansion to Used Vehicles
For the first time, pre-owned clean vehicles are eligible for a tax credit of up to $4,000. This applies to 30% of the vehicle price, and is up to a maximum of $4,000. Example: If a used EV costs $10,000, the credit would be $3,000 (30% of $10,000). If a used EV costs $25,000, the credit is capped at $4,000.
However, there are added restrictions:
- The vehicle must be at least two model years old at the time of purchase.
- The purchase price must be $25,000 or less.
- The sale must go through a licensed dealer (private sales do not qualify).
- The vehicle must not have been transferred after August 16, 2022, except to the original owner.
Eligibility Criteria for Taxpayers and Vehicles
To claim the Clean Vehicle Tax Credit, both taxpayers and vehicles must meet specific eligibility requirements.
Taxpayer Eligibility
To qualify, you must:
- Meet AGI limits
- File as an individual (single, head of household, or jointly).
- Have sufficient tax liability. This is a nonrefundable credit, meaning it cannot exceed the total taxes you owe.
- Use the vehicle primarily in the U.S. for personal or business purposes.
- For used vehicle buyers:
- You cannot have claimed this credit in the past three years.
- You cannot be claimed as a dependent on another taxpayer’s return.
Note: Businesses purchasing EVs may qualify for a separate Commercial Clean Vehicle Credit.
Vehicle Eligibility
To qualify, a vehicle must:
- Be an electric vehicle (EV), plug-in hybrid (PHEV), or hydrogen fuel cell vehicle (FCV).
- Have a battery capacity of at least 7 kWh.
- Be assembled in North America.
- Meet battery sourcing rules:
- A required percentage of critical minerals must come from the U.S. or a trade partner country (40% in 2023, rising to 80% by 2027).
- A required percentage of battery components must be manufactured or assembled in North America (50% in 2023, reaching 100% by 2029).
- Fall within MSRP limits:
- $80,000 for SUVs, pickup trucks, and vans.
- $55,000 for sedans and other vehicles.
You can verify the eligibility of your vehicle with Fueleconomy.gov.
How to Claim the Clean Vehicle Tax Credit
Switching to clean energy vehicles is a great step toward reducing costs and improving sustainability, but ensuring you maximize your tax savings requires careful planning. Here’s how to properly claim the Clean Vehicle Tax Credit.
Gather Required Documents
Here are some of the essential documentation you will need for auditing and verification purposes when claiming the credit:
- Sales contract. Must include the purchase price, date of sale, and Vehicle Identification Number (VIN).
- Manufacturer’s certification. Confirms that the vehicle meets tax credit eligibility requirements.
- Dealer report. Required for vehicles purchased in 2024 or later when using the point-of-sale credit transfer.
Choose How to Claim the Credit
- For vehicles purchased in 2023 or earlier: Claim the credit when filing your tax return using IRS Form 8936.
- For vehicles purchased in 2024 or later: You can transfer the credit to a participating dealer to reduce the purchase price immediately instead of waiting until tax filing. Alternatively, you can file IRS Form 8936 with your tax return.
Note that if your income exceeds the eligibility limits, you may have to repay the credit if claimed at the point of sale.
Are you transitioning to a more fuel-efficient fleet or looking to reduce emissions in your business operations? Or are you looking to lower personal costs while making an environmentally conscious choice? Our CPAs can help you with a tax plan that will do just that, while keeping more money in your pocket. Contact us today!
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.