Recent legislation (the Inflation Reduction Act of 2022 or IRA 2022) updated the requirements related to electric vehicle purchases made after August 16, 2022.
As a refresher, taxpayers may qualify for a federal income tax credit up to $7,500 for the purchase of a qualifying vehicle. Below, we outline the credits available for purchases in 2022 and future years, as well as the eligibility requirements.
Which Rules Apply to Me?
- Purchased and took possession prior to 8/16/22 = Pre IRA 2022 rules here.
- Purchased with written contract prior to 8/16/22, but placed in service after 8/15/22 = Pre IRA 2022 rules
- Purchased after 8/15/22 and placed in service by 12/31/22 = Pre IRA 2022 rules IF vehicle was assembled in North America. If not assembled in North America, no credit allowed.
- Purchased after 8/15/22 and placed in service in 2023 or beyond = new IRA 2022 rules apply
What Are The Requirements?
- Critical Mineral requirement: to be eligible for a $3,750 credit, the applicable percentage (increased annually) of the value of the critical minerals contained in the battery must be extracted or processed in the US or US free trade agreement country (i.e. NAFTA).
- Battery Component requirement to be eligible for a $3,750 credit, the applicable percentage (increased annually) of the value of the battery components must be manufactured or assembled in North America.
The IRS has proposed specific guidance for these requirements slated to be published on April 17, 2023 that go into effect the day after on April 18, 2023.
This means that if a taxpayer wants to make sure they still qualify for the credit, they should take possession of the vehicle no later than April 17, 2023
For vehicles placed in service after 8/15/22 the vehicle needs to be assembled in North America.
Was My Vehicle Assembled in North America?
The best way to determine this is to look up your vehicle on The US Department of Energy list using the Vehicle Identification Number (VIN). Some makes and models could be assembled in North America while others of the same make and model are assembled overseas; so it is important to look up the specific vehicle by VIN to determine if it meets this requirement.
What is the Credit Amount?
The maximum Clean Vehicle Credit is $7,500 per qualified vehicle if they meet both the (1) critical materials and (2) battery component requirements (See above).
If only one of the requirements is met, the credit is limited to $3,500.
Does My Leased Vehicle Count?
According to IRS FAQ: NO, the lessor of the vehicle does not get a credit but the owner (finance company, dealership, etc.) does receive a credit. Some leasing companies will pass the credit on to the lessor, but the lessor does not get a credit on their return.
What Are the Limits To the Credit?
- Modified Adjusted Gross Income (MAGI): For vehicles placed in service after 12/31/22, taxpayers are eligible if their MAGI in either the current OR previous tax year is less than:
- Married filing Joint – $300,000
- Head of Household – $225,000
- All others – $150,000
- Vehicle Price Limitation: The credit cannot be claimed for vehicles whose MSRP (as it was delivered to the dealership by the manufacturer) exceeds:
- $80,000 for vans, pick-up trucks, or SUVs
- $55,000 for all other vehicles
- There is no limit to the amount of times a taxpayer can claim this credit.
- Also, the 200,000 unit per manufacturer phaseout of the credit is repealed for purchases after 12/31/22.
Is There a Faster Way to Get the Credit?
Beginning in 2024, taxpayers will be allowed to assign the credit to the dealer. The credit will reduce the sales price; lowering the out-of-pocket cost to the taxpayer and allowing them to receive the benefit upfront instead of waiting to file that year’s tax return.
Can My Business Receive a Credit?
Yes! Business and tax-exempt organizations are also eligible for a tax credit for the purchase of qualified commercial clean vehicles. You can review the credit and eligibility at the IRS Commercial Clean Vehicle Credit page or consult your business tax advisor to see if you qualify.
What About a Used Vehicle?
A new credit, Previously Owned Clean Vehicle Credit, is available for qualified vehicles purchased after 12/31/22 and before 2033. The credit is worth 30% of the vehicle’s sales price, up to $4,000 maximum credit. The following are the qualifications for the credit:
- Only sales by a licensed dealer, and
- Vehicles sold for $25,000 or less
- Vehicle’s model year is at least 2 years earlier than the calendar year. For 2023, it would be 2021 or earlier models.
- Original use must not have commenced with the taxpayer (i.e. must be previously owned).
- Used car dealers should be able to identify the qualifying vehicles because they must submit credit information directly to the IRS.
- Buyers may only claim the credit once every 3 years (based on precise date of purchase)
- Taxpayers are eligible if their MAGI is equal to or less than:
- Married filing Joint – $150,000
- Head of Household – $112,500
- All others – $75,000
- Must provide the VIN on the tax return.
Does California have a credit?
California does not have a credit for your income taxes, but the state does have a rebate for the purchase of “clean vehicles.” More information can be found at California Clean Vehicle Rebate Program.
If you have any questions about your car purchase, please contact our team to discuss your specific tax situation.
Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and start-up/emerging growth companies. Building connections beyond the code.