Guide to EV Tax Credits
The EV tax credit has gained new attention since the passage of the Inflation Reduction Act of 2022. The bill expanded and modified the tax credit to promote electric vehicle purchases and benefit people buying vehicles through 2032.
As part of the revamped Biden EV taxes, the batteries and critical minerals used in electric vehicles must be partially sourced from the United States. Additionally, the revisions added some income thresholds and price caps.
Purchasing a new EV may qualify the purchaser for a tax credit as high as $7,500. People that buy used electric cars might be eligible for up to $4,000.
What Is a Tax Credit?
Tax deductions and tax credits sound similar but are different. A deduction lowers the filer's taxable income, whereas a credit is a $1 to $1 reduction of the tax liability.
If a tax filer reports $85,000 in income and takes a $7,500 deduction, their income is reduced to $77,500. At the federal tax rate of 12%, that $7,500 reduction in income saves them $900 ($7500 x 12% = $900).
If that same tax filer pays 12% income tax on $85,000, which is $10,200, a $7,500 tax credit reduces that tax obligation to $2,700.
It is important to note that a tax credit only reduces taxes owed and does not result in a tax refund. A tax credit is far more valuable than a tax deduction.
Electric Vehicle Tax Credit Specifics
Some criteria must be met to qualify for the tax credits that went into effect in January 2023, including income thresholds, vehicle price, and specific manufacturing guidelines.
New EVs that are trucks, vans, or SUVs must now have an MSRP, or manufacturer’s suggested retail price, of $80,000 or less to qualify for the EV tax credit. Vehicles such as sedans and passenger cars have an MSRP cap of $55,000, and used vehicles are capped at a purchase price of $25,000 or less.
Income eligibility caps
To qualify for the new credit, a tax filer must also be under the modified adjusted gross income limit (MAGI), which is the filer’s income, after considering allowable deductions and penalties.
For new cars, the caps are:
And for used cars:
To be qualified for the tax credit, the vehicle must have had final assembly in North America.
For new vehicles, the credit is split between a battery requirement and a critical minerals requirement, each accounting for $3,750 of the total credit. These amounts are based on the percentage of the battery manufactured in North America and the portion of the critical materials in the battery that are extracted or processed within the U.S. or a country with which the U.S. has a free trade agreement.
For batteries, these percentages are:
2029 through 2032: 100%
And for critical minerals, the requirements are:
2027 through 2032: 80%
Search for Your Vehicle Online
The government has made it easy to see if a vehicle qualifies. Using fueleconomy.gov, individuals can search cars to ensure they are eligible for federal tax credits. Enter the model year, make, model, and vehicle type to determine if the automobile qualifies.
Another Excellent Option Is Coming
Starting in 2024, taxpayers can transfer the credit to the dealer and directly lower the EV’s price at the point of sale. It’s an excellent option for those who cannot wait to take the tax credits or carry enough tax liability to utilize the total credit.
EV Tax Credits Make Purchasing EVs a Fabulous Deal
As EV prices have fallen, driving ranges have increased, and more manufacturers have entered the EV market, the EV tax credit makes them an incredible value. When accounting for the savings from fueling, very low maintenance requirements, and reductions in pollution, EVs are on their way to becoming unbeatable with the help of the tax credit.
Jessica Eller is a tax preparer based in Charleston, SC. Jessica Eller can assist you with your tax return preparation and planning needs.
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