Electric Vehicle Tax Credits 2023: What You Need to Know

If you're shopping for an electric vehicle (EV) or plug-in hybrid electric vehicle (PHEV) in 2023, it's important to be aware that the Inflation Reduction Act of August 2022 brought major changes to federal EV tax credits. Notably, the rules specifically addressing battery minerals and components will be activated when the U.S. Treasury Department issues further guidance in March 2023. Highlights include:

• Qualifying vehicles must be assembled in North America.
• Starting in March 2023, increasing percentages of battery minerals and components must be sourced from the U.S. or from one of its free-trade partners.
• There are significant new eligibility limits on both the price of the vehicle and the income of the buyer; if either figure is too high, no credit for you.
• Used EVs sold by dealers will be eligible for a one-time tax credit.
• The manufacturer vehicle sales cap has gone away, meaning brands such as Chevrolet, Tesla and Toyota that reached the previous 200,000-unit limit can once again offer these incentives.
• Starting in 2024, a new mechanism will allow buyers to take the EV tax credit directly from the dealer at the point of sale rather than having to wait for the next tax season.

Why all the changes? The federal government clearly wants to promote the production and sale of affordable mass-market EVs, as well as strengthen our regional EV supply chain. On the downside, the new legislation will eliminate many EVs and PHEVs that previously qualified for an electric car tax credit. Let's take a closer look at all the ins and outs.

How do the new EV tax credits work?

Click on any of the links below to jump to the information you're looking for, or keep scrolling to get all the details.

1. What are the requirements regarding North American supply and production?
2. What are the eligibility limits on new vehicle prices and buyer income?
3. What are the rules for leased EVs and PHEVs?
4. What about tax credits for used EVs?
5. Which new vehicles qualify for the federal EV tax credit?
6. How do I claim the EV tax credit?
7. What happens to the tax credit that existed before the Inflation Reduction Act?
8. What if I purchased a credit-eligible EV before the passage of the Inflation Reduction Act?
9. Which vehicles qualified for the previous federal EV tax credit?
10. FAQs

1. What are the requirements regarding North American supply and production?

• The final assembly of the new vehicle must occur in North America (Canada, Mexico, U.S.). This went into effect on August 16, 2022, and will affect vehicles purchased through 2032.
• The maximum credit available for new vehicles is still $7,500, but the size of the battery no longer dictates how much of the credit you get. Starting in March 2023, the full $7,500 credit will be split into halves with separate criteria:
  1. Critical battery minerals: To qualify for this $3,750 credit starting in March 2023, at least 40% of the critical minerals in the battery must have been either recycled in the U.S. or extracted or processed there (or in any country that has a free trade agreement with the U.S.). After that, the required percentage increases to 50% in 2024, 60% in 2025, 70% in 2026 and 80% in 2027.
  2. Battery components: To qualify for the remaining $3,750 credit starting in March 2023, at least 50% of the EV's battery components must be manufactured or assembled in the U.S. (or in any country that has a free-trade agreement with the U.S.). After that, the percentage increases to 60% in 2024-2025, 70% in 2026, 80% in 2027, 90% in 2028 and 100% in 2029.
• Until March 2023, the full $7,500 tax credit will be available regardless of battery origins. So if you're considering buying an EV that checks the box for final assembly in North America but may not satisfy one or both of the battery requirements explained above, know that the vehicle will continue to be eligible for the full $7,500 tax credit until the Treasury Department's March rules update.
• Blacklisted countries ultimately cannot be involved with battery components or minerals. From January 1, 2024, a vehicle will be ineligible if any of the battery's components were sourced from a "foreign entity of concern," which includes China and Russia as of this writing, as well as Iran and North Korea. As of January 1, 2025, this exclusion will extend to cover critical battery minerals too. That's a big deal given China's outsized role in the minerals supply chain to date.

2. What are the eligibility limits on vehicle price and buyer income?

The following rules are effective as of January 1, 2023:

• Price limits for new vehicles
  1. SUVs, vans and pickup trucks: no more than $80,000
  2. Any other qualifying vehicle: no more than $55,000
• Income limits for new vehicles
  These limits are based on modified adjusted gross income (MAGI), which is roughly the adjusted gross income with certain allowable deductions added back in, for the current or prior tax year. Depending on filing status, the limits are:
  1. Joint tax returns or a surviving spouse: MAGI must not exceed $300,000.
  2. Head of household: MAGI must not exceed $225,000.
  3. Individual or any other filing status: MAGI must not exceed $150,000.

3. What are the rules for leased EVs and PHEVs?

If you're leasing the vehicle, the IRS defines the original user as the company that leased it to you, which is often the manufacturer. In this scenario, the tax credit goes to the leasing company. They're not obligated to pass those savings on to you, but sometimes they will, so it's worth asking. Starting in 2024, the credit can be immediately applied as a discount towards the lease.

4. What about tax credits for used EVs?

The tax credit for used EVs will be calculated at either 30% of the vehicle's value or $4,000, whichever is less. The rules for used EVs went into effect on January 1, 2023, and are as follows:

• Price limit for used vehicles
  There is a hard eligibility ceiling at a sale price of $25,000 for all used EVs regardless of type.
• Income limits for used vehicles
  By filing status, the limits are:
  1. Joint tax returns or a surviving spouse: MAGI must not exceed $150,000.
  2. Head of household: MAGI must not exceed $112,500.
  3. Individual or any other filing status: MAGI must not exceed $75,000.
• Other eligibility requirements for used EVs
  1. The vehicle must be at least two model years older than the calendar year in which it is purchased.
  2. The used EV tax credit will only apply once in the vehicle's lifetime. Subsequent owners will not be eligible.
  3. Once a buyer has taken the federal used EV credit, they are not eligible for another credit for three years.
  4. The vehicle must be for personal use and "not for resale."
  5. The vehicle must be purchased through a dealer.
  6. Only an individual may claim the used EV tax credit. Businesses are excluded.

5. Which new vehicles qualify for the federal EV and PHEV tax credit in 2023?

The following vehicles should qualify for the federal EV tax credit because they are assembled in North America. Until March 2023, each vehicle should qualify for the full $7,500 tax credit. After the specific battery production requirements have been established in March, we'll have a better idea of the exact tax credit amount for each vehicle, and the list of eligible vehicles will likely change at that time. Our list is based on data from the U.S. Internal Revenue Service that was current as of February 3, 2023.

Whether or not the vehicle you're interested in is on the list, it's a good idea to double-check its build location to be sure. You can run the vehicle identification number (VIN) through a VIN decoder and look for the country name in the "Plant Information" field at the bottom of the page, or else simply check the window sticker if you have access.

It's also worth noting that the vehicle must be purchased for "original use" in order to qualify for the federal tax credit, meaning that the vehicle is for use by the taxpayer, not for resale. This takes flipping out of the equation. You cannot buy the vehicle and then immediately resell it in hopes of getting the tax credit.

We will strive to keep our list up to date as vehicle manufacturers continue to submit the applicable vehicle identification information to the relevant government agencies and more information becomes available.

Source: Edmunds data, the IRS and the U.S. Department of Energy

6. How do I claim the EV tax credit?

Your process for claiming the EV tax credit depends on when you purchased the vehicle. If you purchased an eligible EV in 2022, the tax credit can be claimed on IRS Form 8936 when you do your taxes in 2023. Your tax person should know how to fill it out and if you're using tax software, it should guide you through the process. Those purchasing an eligible EV in 2023 will claim the credit when preparing their taxes in 2024. Starting in 2024, you can elect to transfer the EV tax credit to your qualified dealer at the point of sale and effectively turn the credit into a discount on the car, eliminating the previous lag time between the purchase and tax season.

7. What happens to the tax credit that existed before the Inflation Reduction Act?

The previous $7,500 tax credit, which did not have limitations on income, price or battery component sourcing, remained in effect until December 31, 2022. However, when the Inflation Reduction Act was signed into law in August 2022, the North American "final assembly" requirement immediately applied. This reduced the pool of vehicles to choose from and incentivized automakers to locate more of their supply chains and factories within North America.

8. What if I purchased a credit-eligible EV before the passage of the Inflation Reduction Act?

If you purchased an eligible EV or PHEV prior to August 16, 2022, the tax credit should still be valid on your 2023 income taxes even if that vehicle is no longer on the approved vehicle list. Even if you had a written binding sales contract prior to August 16 but take delivery of the vehicle in 2023, the older rules of the tax credit should still apply.

This federal incentive has often been referred to as a flat $7,500 credit, but it's only worth $7,500 to someone whose tax bill at the end of the year is $7,500 or more. Let's say you owe $4,000 in income tax — that's all the tax credit will be. Uncle Sam's not writing a refund check for the other $3,500. And an unused portion of the credit can't be applied against the following year's taxes. This is because the electric vehicle tax credit is nonrefundable. It can bring your federal tax bill to zero, but it will not stack on to a potential tax refund.

If you are leasing the EV, the tax credit goes to the manufacturer that's offering the lease, not you. The carmaker will likely factor the credit into the cost of the lease to lower your monthly payment, but this isn't mandatory.

The previous credits were also based on the electric vehicle's battery size. Most electric vehicles qualified for the full $7,500, but for some plug-in hybrid models, the credit amount could fall well below the maximum credit. For example, the Toyota Prius Prime plug-in hybrid only qualified for a $4,502 tax credit.

9. Which vehicles qualified for the previous federal EV tax credit?

The U.S. Department of Energy maintains the entire list. You can sort by vehicle type or manufacturer.

10. FAQs

How does the EV charger tax credit work?
If you are installing an EV charger at your home, the federal credit is generally 30% of the charger's cost or $1,000, whichever is smaller. For those wanting to install an EV charger at a business or investment property, the credit is generally 30% of the charger's cost or $30,000, whichever is smaller. You can claim the EV charger tax credit the following year on your income taxes using IRS Form 8911. Some states may have additional incentives for installing an EV charger, so it's worth looking into this list maintained by the DOE. Your local utility company might also have incentives for installing an EV charger.

How much can you write off for an electric car?
Technically, a write-off is a tax deduction, whereas the federal EV tax credit of up to $7,500 is just that — a tax credit. The difference is that a $7,500 write-off reduces your taxable income by that amount before the tax is calculated, whereas a $7,500 credit means you pay $7,500 less in tax than you would have otherwise. In case that didn't clear things up, just remember that for a given dollar amount, a tax credit means a lot more money in your pocket than a write-off. The maximum federal tax credit of $7,500 on an eligible electric vehicle is effectively a $7,500 handout to you, which is far more than what you'd gain if you simply subtracted $7,500 from your taxable income. It's also worth looking into this list of state EV incentives maintained by the DOE so that you can maximize the benefits of buying an EV.

How does the federal tax credit for EVs work?
In order to qualify for the full $7,500 federal EV tax credit, the EV you purchase has to be brand new and assembled in North America. Beyond that, increasingly stringent geographical requirements are being phased in regarding the composition and production of the car's battery pack. Read our full article for the latest details. Until 2024, the way you claim the federal tax credit for EVs is by using IRS Form 8936, which you submit as part of your annual taxes to the federal government. From 2024 onward, you'll also have the option of transferring your federal EV tax credit to a qualified selling dealer and receiving the amount of the credit as a discount on the car, as opposed to having to wait for tax season.

Was there any fine print for the previous EV tax incentives?
Yes. One rule limited the federal tax credit to the original buyer of a qualified EV or plug-in hybrid. There were a few other conditions:

• If you were leasing a vehicle, the credit stayed with the manufacturer that offered the lease since the manufacturer was the actual owner of the car. In most cases, the tax credit was factored into the cost of the lease, so the customer would benefit to some extent.
• The credit wasn't applicable to an electric vehicle being purchased for the purpose of reselling it. That's a gray area, though, and would be tough for authorities to prove.
• The vehicle had to be primarily used in the United States.
• Plug-in and battery electric vehicles had to be built by qualified manufacturers to be eligible for the full $7,500 credit.
• Plug-in hybrids and battery electric vehicles also had to have battery packs that were rated for at least 4 kWh of energy storage and were capable of being recharged from an external source.
• Manufacturers were not required to certify to the agency that vehicles met the requirements in order to qualify for the various credits. For vehicles not listed on the Department of Energy site or on the IRS list of qualified vehicles, a buyer could generally rely on the manufacturer's representation that the vehicle was eligible. That statement could either be in writing or on the company's website. The same thing went for electric motorcycles, plug-in and EV conversions, three-wheel EVs and low-speed EVs.

Are there tax credits from states or other sources?
Yes. While the federal tax credits for plug-in and natural gas vehicles get the most mention, there also are dozens of state and regional incentives on plug-in vehicles and those that use alternative fuels. Many states have a dozen or more programs. Many, however, apply only to businesses. Some credits come in the form of exemptions from fees and inspections. Others are non-monetary incentives such as carpool lane access and free parking.

Retail buyers in a number of states can get some cost relief in the form of tax credits, rebates, or reduced vehicle taxes or registration fees for buying a qualified alternative-fuel or electric-drive vehicle.

In California, for example, people who buy or lease a new electric car can get a $750 cash rebate. That's in addition to the federal tax credit, and the tandem can reduce the effective out-of-pocket cost of the car by up to $8,000. Plug-in hybrids are a little different. Because they have smaller batteries and burn gasoline part of the time, the reward is offered on a sliding scale depending on battery size, up to $750 under California's Clean Fuel Reward program.

The U.S. Department of Energy also has an interactive chart of state incentives. It's a good idea to be sure about available state and local incentives before you shop. Just because a state has a program doesn't mean it will continue indefinitely.

How about fuel cell cars?
Hydrogen fuel cell electric vehicles do qualify for incentives in some states and are explicitly mentioned in the Inflation Reduction Act as qualifying vehicles. Take a look at the U.S. Department of Energy website to see the latest hydrogen laws and incentives.

How did the previous electric vehicle tax credit work?
The previous federal tax-credit incentive was worth up to $7,500 to someone whose tax bill the following year was $7,500 or more. Let's say you bought a Hyundai Ioniq 5 EV or another eligible vehicle and you owed $6,000 in income tax for that year. That's all you'd get; the IRS would ignore the remaining $1,500. If you bought an EV in 2022, you will need to complete and file IRS Form 8936 with your federal tax return to claim the credit. If you are leasing, the tax credit will go to the finance company, not you. The carmaker will likely factor the credit into the cost of the lease to lower your monthly payment, but this isn't mandatory.

Is there still a federal tax credit for electric cars in 2023?
Yes, but it depends on when you purchased. Those who bought an eligible electric car before the adoption of the Inflation Reduction Act on August 16, 2022 should qualify for the previous federal tax credit of up to $7,500. The exceptions are Tesla, Toyota and General Motors, whose tax credits were phased out in 2022 but returned in 2023. The previous tax credit was also available on fuel cell electric vehicles and plug-in hybrid electric vehicles, but the amount varied based on battery size. There are fewer cars that are eligible for EV tax credits in 2023 after the Inflation Reduction Act, but they do exist and you can see the list in this article.

Does California have a tax credit for electric cars?
California offers rebates, as opposed to tax credits, for eligible vehicles. The rebates are for up to $750 for electric vehicles and plug-in electric vehicles, based on the size of the battery. Your local utility company might also offer an incentive on electric vehicles, so explore all your options.

Is there a tax credit for buying a Tesla in 2023?
Yes. Tesla customers are now once again eligible for the new tax credit in 2023 and onward. That said, the vehicle must fall under the pricing rules and income requirements discussed in this article.