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Inflation Reduction Act – Tax Credit for Electric Vehicles

With the signing of the Inflation Reduction Act on August 12th, 2022, the tax credit for the purchase of electric vehicles got a nice makeover. Under the previous rules, certain qualified vehicles purchased offered a tax credit of up to $7,500 to eligible taxpayers. The amount of the credit was determined by various factors including the capacity of the battery used to power the vehicle and how many vehicles the manufacturer of the electric vehicle had sold. Beginning on August 16th, 2023, a requirement was added that the final assembly of the vehicle must have taken place in the US in order to claim the credit. 

Beginning in 2023, the amount of the credit for purchasing an electric vehicle is still determined by the battery of the vehicle meeting certain criteria. The maximum credit available is $7,500 for the purchase of a new electric vehicle, broken down by two components. To qualify for the Critical Minerals portion of the credit (up to $3,750), 40% of the battery’s critical minerals must have been extracted or processed in the US or a country which has a free trade agreement with the US, or must have been recycled in North America. The 40% amount increases to 50% in 2024, 60% in 2025, 70% in 2026, and 80% in 2027 and thereafter. 

To qualify for the Battery Components portion of the credit (up to $3,750), at least 50% of the value of the battery’s components must have been manufactured or assembled in North America. The 50% amount increases to 60% in 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% in 2029 and thereafter.

Some other limitations include the sales price of the vehicle and the taxpayer’s income. The sales price limitations for electric vehicles are $80,000 for vans and SUVs and $55,000 for passenger vehicles. The income limitation is taken from taxpayer’s modified adjusted gross income. The taxpayer can use the lesser of the current or prior year modified adjusted gross income. The income limitations for 2023 are $150,000 for single taxpayers, $225,000 for head of household, and $300,000 for married taxpayers filing jointly. 

A major upgrade to the electric vehicle tax credit is that purchasers of a used electric vehicle now qualify for a credit, whereas previously the credit was only available if you purchased the electric vehicle new. The credit for the purchase of a used EV is 30% of the purchase price, up to $4,000. The EV must be at least two years old, and purchased for less than $25,000. Other limitations on this credit include: 

  • Modified gross income cap of $75k for individuals, $112,500 for head of household and $150k for married filing joint returns
  • Used vehicle must be purchased from a dealer
  • Purchaser must be an individual (no businesses) to qualify for used credit
  • Purchaser may only claim one used vehicle credit per three years
  • Used vehicle qualifies for tax credit only once in its lifetime
  • Credit may be applied at time of sale by dealer
  • Credit terminates on December 31, 2032

If you purchased a new or used electric vehicle after January 1st 2023 and have questions on how to get the most out of the available tax credits, be sure to contact Eiger, Lang & Company, CPA, LLC. We are here to make your life less taxing!