Tax credits for electric vehicles aren’t a new thing. Actually, the first credits appeared all the way back in 2005 with the Energy Policy Act. There have been numerous changes since then to tax credit rules and regulations. In fact, there are TWO sets of rules for cars purchased during 2023. If you are considering buying a vehicle this year, it’s important to know if you can take a credit. Let’s take a look at the electric car credits for 2023. 

There are some general rules that apply for electric vehicles no matter when you purchased the vehicle during 2023. We’ll review these general rules first and then talk about the changes that are effective after April 17th.

We’ll also talk about a leasing loophole that could save you money.

General Rules

You may qualify for a credit up to $7,500 if you buy a new, qualified plug-in EV or fuel cell electric vehicle (FCV). The Inflation Reduction Act of 2022 (IRA) changed the rules for this credit for vehicles purchased from 2023 to 2032.

To qualify, you must:

  • Buy it for your own use, not for resale
  • Use it primarily in the U.S.
  • Your modified adjusted gross income (AGI) may not exceed:
    • $300,000 for married couples filing jointly
    • $225,000 for heads of household
    • $150,000 for all other filers

Side note: you can use your modified AGI from the year you take delivery of the vehicle or the year before, whichever is less. If your modified AGI is below the threshold in one of the two years, you can claim the credit.

In addition, the vehicle you purchase needs to meet certain qualifications:

  • 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 (see below)
  • Fuel Cell Vehicles do not need to be made by a qualified manufacturer to be eligible
  • Undergo final assembly in North America
  • Meet critical mineral and battery component requirements (as of April 18, 2023)
  • You buy the vehicle new
  • Seller reports required information to you at the time of sale and to the IRS
  • Vehicle’s manufacturer suggested retail price (MSRP) can’t exceed $80,000 for vans, sport utility vehicles and pickup trucks and $55,000 for other vehicles

MSRP is the retail price of the automobile suggested by the manufacturer, including manufacturer installed options, accessories and trim but excluding destination fees. It isn’t necessarily the price you pay.

You can look up your make & model on the government’s Fuel Economy website. At the time of this writing, only 9 manufacturers have qualifying cars across 33 make & model configurations.

The credit is nonrefundable, so you can’t get back more on the credit than you owe in taxes. Also, you can’t apply any excess credit to future tax years.

Date Specific Rules

In addition to meeting the general rules, there are separate rules for cars that were purchased between January 1, 2023 and April 17, 2023.

For cars purchased between these dates, the credit amount is the following:

  • $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
  • Up to $7,500 total
  • In general, the minimum credit will be $3,751 ($2,500 + 3 x $417), the credit amount for a vehicle with the minimum 7 kilowatt hours of battery capacity

Beginning on April 18, 2023, the rules were tightened to require that vehicles meet critical minerals and/or battery components.

For cars purchased after April 18, 2023, maximum credit amounts are as follows:

  • $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

Leasing Loophole

The IRA changed the rules on electric vehicles to encourage credits only for manufacturers assembling a substantiation portion of the vehicle in North America. However, the rules only changed in this regard for privately purchased vehicles – ones used for personal (non-business) purposes.

Under the IRA, leasing is categorized as a commercial business and is, therefore, exempt from regulations that require the vehicle and battery components to be made in North America. This allows the car dealership to take the credit on their tax return and claim a credit that you wouldn’t be able to take personally. If you have your heart set on a vehicle that no longer meets the tests above, you may wish to look into leasing and compare your total out of pocket costs.

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