Federal Tax Credit

As of 2023, there are now income caps to qualify for the Clean Vehicle Credit. The below are the modified adjusted gross income (AGI) limits:

• Joint filers must have an income of $300,000 or less. 
• Heads of household must have an income of $225,000 or less. 
• Individual filers must have an income of $150,000 or less.

You can use your modified AGI from the year you take delivery of the vehicle or the year before, whichever is less. If your AGI is below the threshold in one of the two years, you can claim the credit.

To qualify for the federal tax credit, a vehicle must meet three requirements:

• Its final assembly location must be within North America;
• Its Manufacturers Suggested Retail Price (MSRP) must be under a certain limit;
• It must meet one or both of two complicated sets of battery requirements.

We’ll go into each of these in more detail.

Final Assembly Location     
To qualify for the federal tax credit, the vehicle’s final assembly location must be within North America. If the vehicle is assembled outside of North America, it is irrelevant whether it meets the other sets of requirements; it does not qualify. 

Price Cap     
To qualify for the federal tax credit, a vehicle may not exceed the MSRP cap of vehicles in its class. For sedans and hatchbacks, this limit is $55,000; for SUVs, pick up trucks, and vans, the limit is $80,000. To be clear, if you are looking for a sedan and it has an MSRP of $52,000, but the dealer sells you the car for $57,000, you still qualify for the federal tax credit because it's based on MSRP, not final purchase price. 

Similarly to the final assembly location, if the vehicle does not meet the price cap requirement, it is irrelevant whether it meets the other sets of requirements; it does not qualify.

Battery Requirements    
The IRA includes two new battery requirements that vehicles must meet: one for critical minerals and one for battery components. Each requirement is worth $3,750; so if, in addition to meeting the final assembly location and MSRP cap requirements, a vehicle meets both battery requirements, it qualifies for $7,500. But if it only meets one of the two battery requirements (in addition to final assembly location and MSRP cap), it only qualifies for $3,750. And if it meets neither battery requirement, it does not qualify for a tax credit, regardless of its assembly location or MSRP. 

As a consumer, you do not need to know or memorize these battery components. You can simply visit our shopping tool to see what qualifies for what. But if you’re interested in the details, here they are:

The new battery requirements fall into two buckets: critical minerals and battery components. 

• Critical Minerals: Starting 2023, 40% of the battery's minerals (by value) must be mined OR processed in North America, or a country with a free trade agreement with the US or recycled in the US. This percentage will ramp up over time (see table below). 

• Battery Components: Starting 2023, 50% of the value of battery components must be manufactured OR assembled in North America. This percentage will also ramp up over time, see table below.

   

In addition, there is another battery sourcing provision: the "foreign entities of concern" component. Starting in 2024, to qualify for the federal tax credit, vehicles cannot have any battery components from a foreign entity of concern (i.e. Russia and China). Starting in 2025, batteries cannot have any critical minerals from a foreign entity of concern to qualify.

If your vehicle of choice does not qualify for the Clean Vehicle Credit, you may want to consider leasing. The IRA set up the Commercial Vehicle Tax Credit that does not have all the complicated requirements of the Clean Vehicle Credit for individuals. That means that a manufacturer can sell a vehicle to its leasing arm, which can then take advantage of the federal tax credit. Many are deciding to pass on the savings to consumers in the form of lower monthly payments.

Starting on January 1, 2024, consumers have the choice to apply for the tax credit during their yearly taxes OR choose to transfer the clean vehicle credits to qualified sellers (car dealerships) at the time of sale and use the credit amount as a downpayment or a reduction of the manufacturer's suggested retail price (MSRP).  Dealers interested in offering the credit at the point of sale must register with the IRS, and buyers must confirm that they meet the tax credit’s income limit. Buyers can then choose to receive cash or apply the credit toward the cost of the EV. If a buyer’s income exceeds the limit, they will need to repay the credit to the IRS when they file their taxes. As an important note, your personal tax liability is not a factor if you choose to transfer the clean vehicle credits to a qualified dealer. Your personal tax liability is a factor if you buy from a non-IRS registered dealer and claim the credit on your yearly taxes. 

The list of vehicles that qualify for the federal tax credit is ever-changing as battery requirements ramp up, manufacturers shift their supply chains, and new vehicles come on the market. We keep our Drive Green shopping tool up-to-date so you just have to look one place to find out which vehicles qualify for what federal (and state!) incentives.

Starting in 2023, used electric vehicles qualify for the federal tax credit for the first time! Here are the fast facts prospective buyers need to know. 

• There are no battery sourcing requirements for used vehicles. 
• Buyers can expect a tax credit of $4,000 or 30% of sales price, whichever is lower. 
• The car must be bought from a dealership and be at least 2 years old. 
• The cost of the car cannot exceed $25,000. 
• The used car tax credit can only be on the first resale of a vehicle. 
• The income threshold to qualify is $150,000 for joint filers and $75,000 for a single filer.
• Buyers can only use this credit once every 3 years.