Electric Vehicle Tax Credits and Rebates Explained
The quality of electric cars has improved greatly in recent years. And because the cost of lithium-ion batteries has fallen so much, we now have several affordable choices. The federal tax credit can cut your costs by up to $7,500. With these incentives, many electric car models cost much less than the average new car in America.
Plug-in electric vehicles and fuel cell vehicles qualify for a federal income tax credit of up to $7,500. The federal tax credit was altered as of August 16, 2022, when President Biden signed the Inflation Reduction Act (IRA) into law. Below you will find an explainer of the federal tax credit from January 2023 onwards. If you'd like to skip to list of cars that are eligible for the federal tax credit, go to the Department of Energy's Fuel Economy website.
Requirements as of January 1, 2023
The new federal tax credit (now known as the Clean Vehicle Credit) from the IRA went into effect on January 1, 2023 and is valid through 2032. The changes are vast and complicated, so please read the below carefully before considering your next electric vehicle purchase.
Special Circumstances: January 1, 2023 - April 17, 2023
The IRA adds new requirements for the Clean Vehicle Credit, which we discuss in more detail below. However, one key piece of those requirements - concerning the battery components and minerals - was delayed, which means vehicles were eligible for the federal tax credit, in this time period, but not necessarily later in 2023, and vice versa. In December 2022, the U.S. Treasury Department said it will delay guidance on the required sourcing of electric vehicles batteries until March 2023. The guidance has been updated and the special circumstances time period ended April 17, 2023.
What does this mean? For this short time period, certain electric vehicles, that have their final assembly done in North America, qualified for the Clean Vehicle Tax Credit regardless of the battery constraints mentioned below. However, all other conditions (mentioned below) must be met in order for the consumer to receive the tax credit.
Note, according to the IRS "vehicles ordered or purchased prior to but placed in service after Treasury and the IRS issue guidance will be subject to the critical mineral and battery component requirements." Meaning, if the vehicle you purchased only qualifies for the federal tax credit during this window of time from January 1, 2023, until April 17, 2023, your vehicle needs to be in your possession (aka in service) in order to receive the tax credit.
The other changes to the federal tax credit made by the Inflation Reduction Act are below.
No More Manufacturer Cap
Previously, the federal tax credit was phased out for manufacturers that had sold 200,000 EVs within the United States. The new Clean Vehicle Credit removes that cap.
New Income Requirements
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.
Limit to Tax Credit Claims
Individuals can only apply for the federal tax credit once every three years.
New Vehicle Requirements
In order to qualify for the federal tax incentive, the vehicles will have to (a) be assembled in North America, (b) meet manufactured suggested retail price (MSRP) cap requirements, and (c) meet complicated battery requirements, which will ramp-up and change over time.
A vehicle may not exceed a certain MSRP cap in order to qualify for the federal tax credit:
- Sedans & hatchbacks - $55,000
- SUVs, pick-up trucks, & vans - $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.
The IRS has a list of qualified manufacturers that have vehicles that are currently eligible for a credit provided all other requirements are met.
Consumers will also need to run the vehicle identification number (VIN) through this IRS tool to make sure the specific vehicle they're purchasing qualifies for the tax credit.
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).
- If a vehicle meets this requirement, it qualifies for $3,750 of the federal tax credit.
- Battery Components
- Starting 2023, 50% of the value of battery components must be manufactured OR assembled in North America. This percentage will ramp-up over time, see table below.
- If a vehicle meets this requirement, it qualifies for $3,750 of the federal tax credit.
- If a vehicle meets BOTH battery requirements, it qualifies for the full $7,500 federal tax credit.
| Year | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 |
| Critical mineral % | 40% | 50% | 60% | 70% | 80% | 80% | 80% | 80% | 80% | 80% |
| Battery component % | 50% | 60% | 60% | 70% | 80% | 90% | 100% | 100% | 100% | 100% |
The list of vehicles that meet these requirements is ever-changing and can be found here.
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.
Used Vehicles
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.
2024 and beyond
Starting in 2024, the consumer will be able to choose to transfer the tax credit to the dealership, making the tax credit a point-of-sale rebate. This is great for folks who previously were not able to benefit from the tax credit because of personal tax liability. The details of this process are still being worked out.
Leasing Loophole
If your vehicle of choice no longer qualifies 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 individual vehicle/Clean Vehicle Credit. That means that a manufacturer can sell a vehicle to a dealership and that dealership 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.
How do I start the buying process?
We update our Drive Green shopping portal so you can find out - in one place! - what the federal tax credit and state rebate is for any vehicle in Rhode Island and Massachusetts. Click here to start shopping!
Edmunds Guide for Federal Tax Incentives
If you have more questions about federal tax credits, we recommend the Edmunds Guide. They have the most up-to-date information about which cars qualify, the maximum incentive you can receive for each car, and the up-to-date changes the Inflation Reduction Act will make to the federal tax credit over time.
Massachusetts
The Massachusetts Offers Rebates for Electric Vehicles (MOR-EV) program was reestablished as of January 1, 2020. In July 2022, Governor Baker signed a climate bill into law that, among many other things, changes the format of the state rebate for electric cars. We are frequently checking in with the state on when these changes will take effect. So far, they have not given us a timeline, so for now, the old rebate structure stands. Once we hear that the new rebate is available, we will update this page.
For now, eligibility requirements are as follows:
- Only applications submitted on or after November 10, 2022 are eligible for the increased rebate of $3,500. All other rebate applications will receive the previous $2,500 rebate for battery electric vehicles.
- Battery Electric Vehicles (BEVs) and fuel cell electric vehicles (FCEVs) with sales prices under $55,000 are eligible for a $3,500 rebate.
- Plug-in Hybrid Electric Vehicles (PHEVs) with sales prices under $50,000 and all-electric ranges of 25+ miles are eligible for a $1,500 rebate.
- Zero-emission Motorcycles (ZEMs) will no longer be eligible.
- The rebate needs to be applied for within 3 months of purchase.
- As of November 10, 2022, you can purchase/lease a vehicle in Massachusetts or outside of Massachusetts.
- You must be a Massachusetts resident to be eligible.
Visit the MOR-EV website to learn more and apply.
UPDATE! Changes to the MOR-EV Rebate are coming July 1, 2023. We will update this page then, but you can find out about the changes here.
Rhode Island
The Driving Rhode Island to Vehicle Electrification (DRIVE EV) program is for Rhode Island residents only. The program was established on July 7, 2022, and only vehicles purchased or leased on or after that date qualify for the program. Program details are as follows:
- There are actually three programs: DRIVE EV, DRIVE+, and DRIVE EV FLEET. DRIVE EV is for all RI residents and DRIVE+ provides additional incentives of up to $2,000 for Rhode Islanders who meet certain income requirements. DRIVE EV FLEET is for small businesses, non-profits, and public sector entities, so we won't go into details here, but please feel free to check out the website.
- Qualified applicants will have 120 days from the date of purchase or lease to apply for the rebate program online. The program is first-come, first-served.
- Vehicles must be purchased at licensed RI Automobile Dealership and registered in RI.
- Purchase or lease of a new EV has to have a final sales and purchase price agreement at or below $60,000.
- Purchase or lease of a used EV must have a final sales and purchase price agreement at or below $40,000.
- Here is a breakdown of the rebates.
Visit the DRIVE EV website to learn more and apply.