How Does the EV Tax Credit Work for 2023?

Buying a new vehicle is a large investment that requires careful consideration. Luckily, many electric vehicle buyers can earn an EV tax credit of up to $7,500 on their purchase starting in 2023, thanks to the recently-passed Inflation Reduction Act.

The US government offers a federal electric vehicle tax credit to encourage individuals to purchase electric or plug-in hybrid vehicles. This credit isn’t new, but the 2022 Inflation Reduction Act dramatically changed the eligibility requirements and credit amounts. 

Policymakers hope the revamped EV tax credit will drive EV adoption and reduce America’s overall carbon emissions. In this article, we’ll explain the new EV tax credit, how it works, who is eligible, and what vehicles qualify.

How Did The Inflation Reduction Act Affect the EV Tax Credit in 2023? 

The Inflation Reduction Act (IRA) overhauled the EV Tax Credit. The changes primarily aimed to better assist lower-income taxpayers and encourage manufacturers to source vehicles in North America.

Under the prior rules, any new EV qualified for the credit until the manufacturer sold 200,000 vehicles. Afterward, buyers of that vehicle couldn’t claim a credit. As of 2022, many manufacturers, including Tesla, had already passed the cap, so their vehicles couldn’t qualify for the credit.

The IRA implemented several new rules that could be positive or negative, depending on your specific situation. Read this IRS press release for all the details.

How Does the EV Tax Credit Work in 2023?

There are many notable changes to this valuable credit starting in 2023. Note that the timing of your EV tax credit is based on the year that you receive the vehicle. So if you ordered a vehicle in 2022, but did not take possession of the vehicle until 2023, the 2023 rules would apply. 

The maximum EV Tax Credit remains unchanged and is capped at $7,500. Not all vehicles are eligible for the full credit. For vehicles receiving partial credits, the calculation is based on the kilowatt capacity of the battery.

Note that the EV tax credit is non-refundable. So if you buy a vehicle that would be eligible for a $7,500 credit but only have a tax liability of $5,000, you will lose out on $2,500 of the credit.

Looking forward to 2024, consumers will have the option of receiving the credit at the time of purchase, instead of waiting until they file their tax return.

Also, starting in 2023, the EV credit is no longer limited to new vehicles. Some used vehicles will also qualify for partial credit. Used vehicles that are at least two years old can receive a credit of up to $4,000 or 30% of the purchase price. The vehicle must be purchased for personal use (and not for resale). 

Income Limits

The new rules created income limitations for claiming the EV Tax Credit. For single taxpayers, you must have an adjusted gross income (AGI) below $150,000 to claim the credit.

Married taxpayers with an AGI below $300,000 can also claim the credit, as well as head of household taxpayers with incomes lower than $225,000. 

No More Production Caps

The new regulations also removed the cap for manufacturers, which was previously set as 200,000 vehicles. 

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Which Electric Vehicles Qualify for a Tax Credit?

The new rules have affected which vehicles qualify for the credit. Here’s a look at the criteria that will affect a vehicle’s eligibility for the credit.

Price Limits

The IRA also imposed price limits for eligible vehicles. New vans, pickup trucks, and SUVs must cost less than $80,000 to qualify. Other types of new vehicles must cost less than $55,000 to make the cut.

New IRS regulations also expanded the criteria for vehicles to qualify as SUVs, so more vehicles are eligible for the higher price limit.

The manufacturer’s suggested retail price, or MSRP, determines whether a new vehicle qualify, not your purchase cost.

However, the updated EV credit also extends to used EVs based on purchase price. Your purchase cost must be below $25,000 for a used EV purchase to qualify.

Sourcing and Manufacturing Requirements.

More complicated than the other EV rules, consumers now have to determine if the vehicle was assembled in North America. 

Several companies have moved their assembly operations to North America to meet this requirement, but you may need to check your specific VIN to determine if it meets the requirement.

Special Rules for EVs Purchased in 2022

For vehicles purchased prior to August 17, 2022, the North American assembly doesn’t apply, but the manufacturer cap was still in place.

From August 17 through the end of 2022, the vehicle must have been assembled in North America, and the manufacturer caps were still in place – however, the taxpayer income limitations did not apply to these purchases.

Commercial Vehicles

The new rules allow commercial vehicles to be eligible for the EV tax credit for the first time. However, the EV credit is only available to commercial vehicles under 14,000 with a 7-kilowatt battery capacity or vehicles over 14,000 pounds with at least a 15-kilowatt battery capacity. 

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The EV Charger Tax Credit is Back

Prior to December 31, 2021, EV chargers were eligible for a tax credit, but the credit was allowed to lapse. The IRA brought back the credit for EV charging expenses. 

Is the EV Tax Credit Better or Worse in 2023?

Because of the complicated new rules that are in place, the changes to the EV credit may be positive or negative for potential car buyers. Higher-income taxpayers may find that they are no longer eligible. The same may be true for consumers looking at higher-end vehicles that exceed the MSRP limitations. 

For consumers looking at vehicles from manufacturers that previously exceeded the 200,000 vehicle cap or considering used EVs, the new changes may prove to be very beneficial.

Get Answers Now

Shared Economy Tax can help you navigate the new EV tax credit and other complicated tax issues. Our tax pros specialize in assisting small business and self-employed taxpayers.

Contact us now to set up a complimentary one-on-one strategy session with one of our veteran tax professionals.