Electric vehicle (EV) tax credits have historically been one of the most substantial federal initiatives available to American consumers, and thanks to a new clean vehicle tax credit program going into effect in 2024, taxpayers no longer need to wait until tax season to reap those benefits.
While new rules make the credit easier than ever to access, some caveats will continue to make obtaining the maximum value a little challenging. Here’s what buyers need to know about the new EV tax credit and how to cash in on those significant savings in 2024.
Unlike previous years, the new EV tax credit will not require taxpayers to wait until tax season to file the paperwork necessary to redeem their clean vehicle incentive. Beginning January 1, 2024, qualified buyers will be able to receive up to $7,500 immediately off the purchase price of a new qualified vehicle and $4,000 off used EVs before ever leaving the parking lot.
Consistent with the federal government’s goal of increasing the number of clean vehicles on the road — specifically, having EV sales make up 50% of all new vehicle sales by 2030 — the new policy aims to create a more level playing field for all electric car shoppers and prospects. Most notably, the new rules allow car dealers to offer shoppers an instant tax break directly off the vehicle’s purchase price, regardless of their tax liability come tax season.
In prior years, EV credits were considered “non-refundable,” meaning buyers would only receive a tax incentive large enough to offset their tax liability. Therefore, if a buyer only owed $3,500 in federal taxes, they would only qualify for $3,500 of the available credit. Because this disproportionally benefited wealthier consumers carrying larger tax liabilities, the new policy removes this requirement and opens the door for lower- and middle-income Americans to qualify for the full, maximum incentive despite having lower tax bills.
What are the qualifications?
While the new policy grants more consumers access to instant savings, it also carries heavier restrictions on what vehicles ultimately qualify for the full $7,500 credit. As outlined in The Inflation Reduction Act of 2022, stricter rules on the vehicle’s manufacturing, battery components, and mineral origins have drastically reduced the number of cars making it on the government’s 2024 green list. In addition, some model variations and MSRP constraints further limit the electric and plug-in hybrids eligible for the full credit.
To qualify for the full $7,500 credit, the vehicle must:
- Have a battery capacity of at least 7 kilowatt hours
- Have a gross vehicle weight rating of less than 14,000 pounds
- Be made by a qualified manufacturer and undergo final assembly in North America
- Adhere to critical mineral and battery component requirements
- MSRP cannot exceed $55,000, or $80,000 for vans, SUVs, and trucks
You can see the comprehensive list of eligible vehicles on the US Department of Energy website.
In addition to vehicle restrictions, some individual purchaser requirements will also play a role in who is eligible for the full credit. To qualify:
- The vehicle must be purchased for the buyer’s own use (not for resale) and must be used primarily in the United States
- Adjusted gross income (AGI) must not exceed $300,000 for married couples filing jointly, $225,000 for heads of households, or $150,000 for all other filers
What if you aren’t sure how much money you’ll make in 2024? You can use the previous year’s income to qualify — as long as you are under that cap in either 2023 or 2024, you’re eligible.
And if you make more than you expected? If you told the dealer you were sure you met the income cap requirement and it turns out you were over the cap in both 2023 and 2024, then you will need to repay the IRS the $7,500 tax credit when you file your 2024 taxes. (The dealer is not involved; that’s between you and the IRS to work out.)
For those purchasing a new car in 2024, selecting a qualified EV or plug-in hybrid is certainly worth considering. While we’ve focused here on EV tax credits for car buyers, we have more information for dealers in this recent piece on the EV Transfer Credit Program. If you have any questions about what vehicles qualify or how to best maximize the available tax credit for buyers or your dealership, please reach out to our auto dealership team.
John Hadwen joined ARB in 2021 as a tax director. He specializes in providing individuals and businesses with comprehensive tax compliance and consulting services related to closely-held business, manufacturing, construction & real estate, and professional services firm taxation. Prior to joining ARB, John was a Tax Principal at a large, regional CPA firm.