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Understanding the $7,500 federal tax credit for electric vehicles can be complex for both buyers and manufacturers. Here are the key points you should be aware of.
The recent Inflation Reduction Act (IRA) has introduced a federal tax credit for electric vehicles (EVs) as part of broader tax and climate legislation aimed at promoting clean energy. This credit, which can reach up to $7,500 for certain EVs referred to as "clean vehicles," is designed to incentivize more widespread adoption of EVs. However, there are numerous uncertainties surrounding how exactly this EV tax credit operates.
Some potential buyers are uncertain about their eligibility to claim the credit, particularly regarding any income restrictions that may apply. Additionally, ongoing adjustments to regulations from the U.S. Treasury Department and IRS have led to confusion regarding which electric vehicles qualify for the full tax credit, both for the 2023 tax year and beyond into 2024.
Despite this confusion, the EV tax credit can be advantageous for certain consumers. To help navigate through the latest changes in EV credit regulations and gain clarity on which vehicles qualify (and which do not), it's crucial to understand the underlying rules.
Furthermore, for those who are eligible, it's essential to know how to correctly claim the EV credit when filing your federal income tax return with the IRS. Below, we delve into some answers to these pressing questions.
Here are the key aspects of the federal electric vehicle tax credit:
The income limits for the electric vehicle tax credit are determined using your Modified Adjusted Gross Income (MAGI), typically found on Line 11 of Form 1040. MAGI considers your Adjusted Gross Income (AGI) with certain deductions or income exclusions added.
According to the IRS, when claiming the EV credit, you can choose the lower of two MAGI values: the MAGI for the year you receive the EV or the MAGI from the preceding year.
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Individuals filing as single won't be eligible for the EV tax credit if their modified adjusted gross income exceeds $150,000. For married couples filing jointly, the income limit is $300,000. Head of household filers who earn more than $225,000 won't qualify for the credit. For all other filing statuses, the income limit for the EV credit is $150,000.
To qualify for the federal EV tax credit for eligible used or previously owned clean vehicles, you must meet the following conditions:
Additionally, for the EV tax credit for used vehicles, the IRS says your MAGI cannot exceed the following income limits.
The income limits for the EV tax credit are as follows:
Determining which electric vehicles qualify for the federal tax credit is a significant concern for potential buyers, particularly regarding the amount of credit they may receive. Currently, only a small number of models are eligible for the full $7,500 tax credit, while others may qualify for half that amount, or in some cases, not at all.
Recent changes in regulations, including stricter rules implemented last spring and more stringent requirements as of January 1, 2024, have influenced which vehicles are eligible for the tax credit. Price limits are a primary factor in determining a vehicle's eligibility for the tax credit.
To qualify for the EV tax credit, vans, pickup trucks, and SUVs must have a manufacturer's suggested retail price (MSRP) of $80,000 or less. For clean cars, the MSRP cannot exceed $55,000. Additionally, previously owned clean vehicles are eligible for the tax credit only if their cost is $25,000 or less. For the purpose of the EV tax credit, a vehicle is considered "used" or "previously owned" if it is at least two years old.
Additional clarification was required regarding the classification of vehicles as SUVs for the purpose of the $80,000 price limit. The Treasury and IRS provided guidance stating that they would utilize criteria derived from the Environmental Protection Agency's (EPA) Fuel Economy Labeling Standard to differentiate between cars and SUVs. This clarification has enabled certain SUVs to become eligible for EV tax credits for both automakers and consumers, expanding eligibility where it was previously unclear.
The guidance regarding the classification of SUVs is retroactive to January 1, 2023. This means that if you acquired your electric vehicle on or after January 2023, you can utilize the new classification criteria to ascertain whether your purchased vehicle qualifies for the tax credit.
To qualify for the federal EV tax credit of up to $4,000, a used or previously owned electric vehicle must meet the following criteria:
To determine if a vehicle qualifies for the used clean vehicle credit, individuals can visit the federal fueleconomy.gov website.
IRS guidance has imposed restrictions on the number of electric vehicles (EVs) eligible for the full $7,500 tax credit, particularly concerning battery and sourcing requirements. These rules, effective for EVs put into service after April 17, 2023, have altered the landscape of EV tax credit eligibility. As a result, an EV that previously qualified for the full tax credit may now only be eligible for half the amount or potentially no credit at all for the 2023 tax year. Furthermore, battery and sourcing requirements are expected to become even more stringent in the future, leading to some vehicles losing their qualification status.
Treasury Secretary Janet Yellen commented on the stricter EV credit rules, emphasizing their importance in helping consumers save money on both new clean vehicles and fuel costs.
For individuals considering purchasing a Cadillac LYRIQ or Chevy Bolt EV, it's worth noting that General Motors' entire electric vehicle lineup was eligible for the full $7,500 EV credit for the 2023 tax year. However, GM has indicated that the LYRIQ's eligibility for the EV tax credit in 2024 may be affected by the stricter requirements.
Additionally, General Motors had plans to halt production of the popular Chevy Bolt EV and EUV by the end of the previous year.
Tesla models, including the Model Y and all versions of the Model 3, qualified for the full $7,500 EV tax credit up until the 2023 tax year. However, eligibility for the EV tax credit in 2024 varies among Tesla models, indicating that not all Tesla vehicles will qualify for the credit.
Last autumn, Mullen Automotive (NASDAQ: MULN) achieved IRS recognition as a "qualified manufacturer" of commercial electric vehicles (EVs), enabling certain models from the automaker to qualify for the EV tax credit of up to $7,500. John Schwegman, Mullen's chief commercial officer, highlighted the significance of total cost of ownership for commercial clients. Schwegman emphasized that tax credits, coupled with reduced fuel and maintenance expenses, present a distinct advantage for Mullen's commercial lineup compared to conventional internal combustion vehicles.
You can access the complete list of vehicles eligible for the EV tax credit on the federal fueleconomy.gov website. Additionally, the Department of Transportation offers a tool on its website where you can input the vehicle identification number (VIN) of an electric vehicle you're interested in to verify its eligibility for the tax credit. Utilizing these resources can aid in making informed decisions regarding the optimal timing for purchasing an EV from a tax perspective.
For further assistance, it's advisable to cross-reference the list of qualifying clean vehicles and consult the IRS' FAQ Fact Sheet pertaining to the clean vehicle tax credit, particularly if you're in the market for a new or used EV.
Changes to the EV tax credit rules for 2024 have been influenced by political controversies in Congress surrounding the tax credit and concerns raised by overseas manufacturers regarding vehicle eligibility. Additionally, stricter regulations regarding battery and mineral component sourcing have led to alterations in the EV tax credit requirements.
To stay informed, it's advisable to verify the list of qualifying clean vehicles if you're considering purchasing a new or used EV. Additionally, referring to the IRS' FAQ Fact Sheet for the clean vehicle tax credit can provide further clarification on eligibility criteria.
Starting January 1, 2024, a new benefit regarding the EV tax credit allows individuals purchasing a clean vehicle to potentially receive the credit as a discount at the point of sale. This means that instead of waiting until tax time to claim the credit, buyers can choose to transfer the credit directly to the dealer, who can then reduce the vehicle price by the amount of the credit.
This option allows consumers to immediately benefit from the EV tax credit when purchasing the vehicle. However, it's important to note that dealers must register to be qualified to pass on EV credit savings to consumers. Qualified dealers can transfer the value of the federal EV tax credit to eligible consumers, with the value being provided as either a cash refund or a discount on the total price of the electric vehicle.
To claim the EV tax credit, you must submit IRS Form 8936 along with your federal income tax return. This form requires the vehicle identification number (VIN) of your electric vehicle to be completed accurately. Form 8936 is specifically designed to calculate your tax credit for eligible two- or three-wheeled plug-in electric vehicles.
A tax credit is indeed available for leased electric vehicles, but with a caveat: the tax credit belongs to the lessor, not the lessee.
Under the Inflation Reduction Act (IRA), leased electric vehicles are categorized as "commercial vehicles," allowing them to qualify for the entire federal clean vehicle credit without needing to meet stringent battery and sourcing requirements. This classification broadens the range of electric vehicles available for potential savings if the dealer opts to pass any tax credit benefits on to lessees.
However, it's important to note that while you may receive savings, such as a rebate or a reduced lease price, the tax credit itself belongs to the lessor, not the lessee.
The Inflation Reduction Act (IRA) reintroduces a tax credit for electric vehicle chargers that had expired two years ago. This credit, known as the "Alternative Fuel Refueling Property tax credit," has been extended for a period of 10 years, remaining in effect until December 31, 2032.
The Inflation Reduction Act (IRA) offers substantial tax credits and incentives, covering more than just electric vehicles. It includes tax breaks for a wide array of environmentally friendly home upgrades, such as the installation of solar panels.
Being audited is comparable to being struck by lightning. You don't want to practice pole vaulting in a thunderstorm just because it's unlikely. Making sure your books are accurate and your taxes are filed on time is one of the best ways to keep your head down during tax season. Check out Vincere's take on tax season!
This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.
For business tax planning articles, our tax resources provides valuable insights into how you can reduce your tax liability now, and in the future.
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