Updated for tax year 2023.
Electric vehicles (EVs), plug-in hybrid electric vehicles (PHEVs), and other clean-energy vehicles continue to gain popularity, especially as gas prices soar. Is it time for you to make the switch?
If you’re new to the EV market, you no doubt have a lot of questions — topics like EV battery range, maintenance costs, and affordability among them. However, many people tend to overlook the potential tax implications of purchasing an electric vehicle.
To help you understand how buying an EV might affect your taxes and your wallet, we’ve put together a comprehensive guide designed to help you decide if you (and your budget) are ready to go electric.
We’ll start with the most exciting part: electric vehicle tax credits.
What is the electric vehicle tax credit?
The EV tax credit is simply a tax incentive for purchasing a clean energy vehicle. This credit is nonrefundable, so it cannot exceed your tax liability.
The EV tax credit has had a lot of changes recently — in August 2022, Congress passed the Inflation Reduction Act (IRA), a bill that included large investments in clean energy, including big changes to tax incentives for EV purchases. We know changes to tax credits can be confusing, which is why we’ve outlined all the details you need to know below.
How do I qualify for the full $7,500 federal electric vehicle tax credit?
The federal clean vehicle tax credit is still worth up to $7,500. To qualify for the full electric vehicle tax credit in tax year 2023, you must meet different requirements set by the IRS depending on when you purchased and started driving the EV.
For vehicles placed in service Jan. 1 to April 17, 2023, you can claim an EV tax credit of up to $7,500 total using the following calculations:
- $2,500 base amount
- Plus $417 for a vehicle with at least 7 kilowatt hours of battery capacity
- Plus $417 for each kilowatt hour of battery capacity beyond 5 kilowatt hours
To qualify for the clean energy credit, vehicles need to have a minimum of 7 kilowatt hours of battery capacity, meaning the minimum credit for vehicles placed in service during this time would be $3,751 ($2,500 + [3 X $417]).
For vehicles placed in service April 18, 2023, and after, you can still claim an EV tax credit of up to $7,500, but the vehicle must also meet new critical mineral and battery component requirements. Because of this, the tax credit calculations look a little different:
- $3,750 if the vehicle meets the critical minerals requirement only
- $3,750 if the vehicle meets the battery components requirement only
- $7,500 if the vehicle meets both
A vehicle that doesn’t meet either requirement will not be eligible for a credit.
Who qualifies for the EV tax credit?
To qualify for the EV tax credit for tax year 2023, you must meet the following requirements:
- You must have purchased the vehicle for your own use (not for resale)
- You must primarily use the vehicle within the U.S.
If you meet the above criteria, you also need to meet the IRS’s income requirements depending on your filing status. To qualify for the EV tax credit in 2023, your modified adjusted gross income (AGI) cannot be more than:
- $300,000 for those married filing jointly
- $225,000 for heads of household
- $150,000 for all other filers
The IRS allows you to use your modified AGI from the year before you took delivery of the vehicle, if that helps you qualify for the EV tax credit. For example, say you are a single filer who purchased an EV in 2023. Your modified AGI in 2023 was $175,000, putting you over the limit to claim the tax credit. However, your modified AGI in 2022 was $120,000. In this case, you could use your AGI from 2022 to qualify for the tax credit in 2023.
What vehicles qualify for the EV tax credit for 2023?
Vehicles must also meet certain criteria to be eligible for the tax credit. To qualify in tax year 2023, your vehicle must:
- Have been purchased new
- Have a maximum MSRP of $80,000 (for vans, sport utility vehicles, and pickup trucks) or $55,000 (for other vehicles)
- 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 (not required for fuel cell vehicles)
- Undergo final assembly in North America
- Meet the critical mineral and/or battery component requirements (for vehicles placed in service April 18, 2023, or after)
When purchasing the vehicle, the dealership also needs to report the required information (your name and taxpayer ID number) to both you and the IRS, otherwise you will not be eligible to claim the credit.
How do I know what vehicles meet the “final assembly completed in North America” and other requirements?
According to the IRS, you’ll be able to find your vehicle’s weight, battery capacity, and final assembly location (also called “final assembly point”) on the vehicle’s window sticker along with its VIN.
The IRS also has an ongoing list of qualified manufacturers that meet all the Inflation Reduction Act requirements. However, not all clean vehicles made by the manufacturers on this list are guaranteed to qualify, so be sure to verify your vehicle’s requirements with your dealer before purchasing if you are unsure.
How do I claim the clean vehicle credit when I file my taxes?
You’ll need to use Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit, to claim the tax credit when filing your income tax return.
TaxAct® can help you claim the EV tax credit when you file with us. If you’re having trouble, here are detailed instructions for how to do so using our tax preparation software.
Can I claim the electric vehicle tax credit for a used car purchase?
As of Jan. 1, 2023, you can claim a used clean vehicle credit for qualified used EVs from a licensed dealer, provided you meet certain requirements.
Just like the regular EV tax credit, the used EV tax credit is nonrefundable, meaning if your tax credit exceeds the amount you owe in taxes, you won’t be able to claim the excess as a tax refund.
To qualify for the used clean vehicle credit:
- You cannot be the original owner of the vehicle.
- You must have bought the vehicle for your own personal use and not for resale.
- You can’t be claimed as a dependent on another person’s tax return.
- You can’t have claimed another used vehicle credit in the three years before the purchase date.
Just like the new clean vehicle credit, eligibility for the used EV credit depends on your income. To qualify for the used EV tax credit in 2023, your modified AGI cannot be more than:
- $150,000 for those married filing jointly or surviving spouse
- $112,500 for heads of household
- $75,000 for all other filers
Also like the credit for new clean vehicles, you can use your prior year modified AGI if that helps you meet the used clean vehicle credit requirements above.
Only certain used vehicles qualify for the credit. To qualify, the used vehicle must meet all the following requirements:
- Have a sale price of $25,000 or less (including dealer-imposed costs or fees not required by law; excluding fees required by law like taxes and title or registration fees)
- Have a model at least two years earlier than the calendar year in which you bought the vehicle (for example, only 2021 and older vehicles would qualify for the credit if purchased in 2023)
- Have been purchased from a licensed dealer
- Not have already been transferred to a qualified buyer after Aug. 16, 2022
- Weigh less than 14,000 pounds (gross vehicle weight rating)
- Have a battery capacity of at least 7 kilowatt hours
- Be used primarily within the U.S.
The dealership must report the required information to you and the IRS at the time of sale to qualify for the used clean vehicle credit.
Are there any state tax credits for buying an EV?
Some states offer additional tax incentives for purchasing (or sometimes leasing) an EV. Each state has different eligibility requirements, many of which differ from the federal EV tax credit requirements discussed above. Because of this, you may still be able to claim a tax rebate from your state even if you don’t qualify for the federal tax credit. So, don’t forget to check!
You can find each state’s unique laws and tax incentives on the U. S. Department of Energy website.
Here’s an example: Colorado residents can claim the state’s EV tax credit for qualifying vehicles titled and registered in Colorado that were purchased or leased before Jan. 1, 2029. How much of a credit you can claim depends on the vehicle type and year you purchased the vehicle but amounts range anywhere from $500 to $12,000.
What are some other tax considerations when buying an EV?
If you’re still on the fence about purchasing an electric vehicle, here are some more tax considerations and financial implications to keep in mind.
1. Higher upfront cost
Currently, clean energy vehicles tend to cost quite a bit more than their traditional counterparts. Purchasing an EV will likely land you with a higher monthly payment, and you’ll pay more in sales tax if you live in a state that charges sales tax.
However, federal and state tax credits can help offset the extra upfront costs of purchasing an EV. And remember, you’ll also be saving money that you would otherwise spend on gas when driving a conventional vehicle.
2. Municipal excise taxes
You may also pay higher municipal excise taxes when driving an EV. Since these vehicles run on electricity, you would be subject to any local municipal taxes on electricity when charging your vehicle’s battery. While this might not seem like a big deal, receiving an unexpectedly high electric bill is never fun, so it’s something to keep in mind.
3. Extra vehicle registration fees (in some states)
It’s also important to note that some states have imposed additional registration fees on clean energy vehicles.
These states justify the extra annual fee by claiming they get a large portion of public funding for highways and bridges through fuel tax revenue (the tax you pay when buying gasoline). Since EV drivers do not pay taxes on gasoline, some states have imposed special registration fees to offset this lost revenue.
As of 2023, 24 states charge extra annual fees for EVs and even some hybrid vehicles. The exact amount depends on your state and vehicle type, but fees currently range from an additional $50-$200 per year.
It’s unclear how long states will continue to impose these fees as more consumers decide to go electric. For now, at least, it’s something to consider when deciding if an EV will fit within your budget.
Is an EV right for you?
Ultimately, it’s up to you to decide whether purchasing an EV, plug-in hybrid, or another alternative fuel vehicle is the right decision. Consider the financial implications carefully to decide whether an all-electric car fits within your budget and lifestyle.
If you decide it’s time to make the switch, just make sure you familiarize yourself with all the electric car tax benefits available to you at both the federal and state level — you don’t want to leave any money on the table.