A New Inflation Reduction Act Electric Vehicle Tax Credit: What You Should Know
Electric vehicles have come a long way in the 21st century, and so have the tax incentives, making the switch to electricity easier for drivers. The first EV tax credit came into effect with the Energy Policy Act of 2005. It applied only to hybrid vehicles and capped out at $3,400 in credit, but it wasn’t long until the amounts climbed higher and the benefits applied to fully electric cars and trucks.
Today, it’s a completely different story. Successive updates to the tax credit have expanded the amount it offers and who can benefit from it. The latest update, the Inflation Reduction Act electric vehicle tax credit, just might contain some of the most exciting changes yet. Take a look at what’s changed and how you can take advantage of it in the guide below.
What Is the Electric Vehicle Tax Credit?
The EV credit is a nonrefundable tax credit that purchasers of qualifying electric vehicles or plug-in hybrids can use to lower their tax liability. In other words, buying a qualifying vehicle will reduce the amount of federal tax you owe by the amount of credit you receive.
Qualifying new EVs could net you a maximum credit of $7,500. Of that amount, $3,750 applies as long as the battery in a new EV contains a certain percentage of minerals that have either been recycled in North America or extracted or processed in the United States or in countries with free trade agreements with the United States.
What’s Different About the New Tax Credit?
The tax credit, as revised in the Inflation Reduction Act (IRA) of 2022, introduces several changes that benefit drivers, dealers, and the EV industry as a whole. Here are the most significant changes.
Used EV Tax Credits
The new credit allows purchasers to claim up to $4,000, limited to 30% of the sale price, for used EVs. In a used EV market that has been steadily growing over the last few years, budget-minded drivers can more easily get behind the wheel.
EV Point of Sale Rebate
Beginning in 2024, the IRA will allow EV buyers to transfer the amount of tax credit they qualify for to dealers. This “point of sale rebate” will open up EV ownership to larger numbers of Americans who can directly lower the sale price of a new EV by up to $7,500 and smaller amounts on used EVs.
No Cap on Manufacturers
Under previous versions of the EV tax credit, car manufacturers that produced more than 200,000 EVs a year couldn’t qualify, and neither could the drivers who purchased their products. The IRA removes that cap, but qualifying vehicles must be assembled in North America.
Tax Credits for Leased Vehicles
Under the latest rules, companies that lease EVs will also qualify for a version of the tax credit. While that doesn’t mean you’ll be able to claim a leased vehicle on your tax return, you may benefit from a discount from the leasing company since these companies typically pass on the savings to their customers.
The Internal Revenue Service is still working to implement the IRA EV tax credit, and the rules surrounding the new changes aren’t yet entirely clear. However, more information is forthcoming, including advice for claiming and how these and other changes will take effect.
Here is a breakdown of who qualifies for an EV tax credit.
To qualify for the new EV tax credit, buyers must have a maximum adjusted gross income of $150,000 for a single-earner household, $225,000 if filing as “head of household,” or $300,000 for a household filing as “joint.”
Electric vans, SUVs, and pickup trucks with a manufacturer’s suggested retail price (MSRP) under $80,000 are eligible for the new credit, as are all other vehicles with an MSRP under $55,000.
The IRA also introduces some new qualifications for EVs. Most notably, qualifying vehicles must be entirely manufactured or at least undergo final assembly in North America. Unfortunately, that means many EVs, like those built in South Korea, Sweden, or Germany, won’t be eligible.
How Do You Claim It?
When you buy an EV, make sure you get a full report, known as a letter of certification, from the dealer. This document contains essential information you’ll need to claim the credit when you file your taxes, including:
The name and taxpayer identification number (TIN) of the seller
The date of the sale and the sale price
The vehicle identification number (VIN)
The vehicle’s battery capacity
The details contained in the report may vary depending on whether the vehicle in question is new or used.
When it’s time to file your tax return, report the information in the letter of certification on IRS Form 8936. Before you finalize your return, find out whether your state offers similar rebates and incentives and use the letter of certification to fill out the relevant state tax forms to get the maximum benefit.
By evee Life Contributor
Published August 30, 2023 1:24PM
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