How Do Electric Car Tax Credits Work?

Quick Facts About Federal Incentives for Electric Cars

Consumers considering an electric vehicle right now may want to weigh how tax credits on zero-emissions cars work and how they could affect any upcoming buying decisions.

The Inflation Reduction Act signed in August 2022 includes electric vehicle tax credits provisions set to reshape how Americans buy electric cars and plug-in hybrids.

Read on to learn the impact. We will tell you about the new changes to federal tax incentives for electric cars. The new tax credits can help defray the cost of buying a zero-emission vehicle when combined with state and local rebates.

How the New EV Tax Credits Work

According to Kelley Blue Book research, a new electric car’s average transaction price came in at about $65,000 in November, nearly a 9% jump from a year ago. The industrywide average that includes gas-powered vehicles and electric cars reached about $48,900 in the same timeframe.

• Extends $7,500 tax credit. The Inflation Reduction Act extends the current incentives of up to $7,500 in tax credits for select electric cars, plug-in hybrids, and hydrogen-powered vehicles that meet its qualifications. The federal government continues to update the list of qualifying vehicles.
• Discount up front. In the future, it’s possible you can qualify to get your EV tax credit at the time of purchase on new vehicles, though if the dealership does not offer it immediately, you can still request the credit on your taxes.
• Caps EV price tags. The new incentives restrict qualifying vehicles to low-emissions trucks, SUVs, and vans with manufacturer’s suggested retail prices (MSRPs) of up to $80,000 and cars up to $55,000.
• No limits for manufacturers. As of Jan. 1, 2023, manufacturers like GM and Tesla were no longer limited on incentives to the first 200,000 EVs sold, which was the case under the old tax credits.
• Used electric vehicle rebate. Anyone considering a used electric car under $25,000 could obtain a new $4,000 tax credit, subject to income and other limits. To qualify, used cars must be two model years old. The vehicle also must be purchased at a dealership. The vehicle also only qualifies once in its lifetime. Purchasers of used vehicles can only qualify for one credit every three years, and to qualify, individuals must make $75,000 or less, or $112,500 for heads of households and $150,000 for joint return filers. The credit ends in 2032.
• Income caps to qualify. The rebates are limited to individuals reporting adjusted gross incomes of $150,000 or less on taxes, $225,000 for those filing as head of household, and $300,000 for joint filers.
• Ineligible cars become eligible. Additionally, the measure allows carmakers like Tesla and General Motors, which had run out of available credits under the old plan, to be eligible for them again in January 2023. However, many of their products would still not qualify due to car price caps.
• New rules on manufacturing locations. To qualify for the subsidy, electric car batteries must be manufactured in the U.S., Canada, or Mexico, while the batteries’ minerals and parts must also come from North America to qualify. Cars with Chinese-made battery components would be ineligible. These rules render many current EVs ineligible. This requirement phases in over time. That means some cars eligible now could become ineligible over time unless manufacturers change their supply chains. However, the U.S. Treasury Department delayed until March the regulations that govern where battery minerals and parts must be sourced.
• Leased vehicles don’t qualify. Under the old and new tax incentives, leased vehicles did not qualify.
• Hydrogen fuel-cell cars remain eligible. The $7,500 credit also applies to hydrogen fuel-cell cars like the Toyota Mirai or Hyundai Nexo. However, those make sense only for buyers who live near one of America’s few hydrogen refueling stations. Those stations are mostly concentrated in California. 

What the Old EV Tax Credits Provided

Before the Inflation Reduction Act, buyers could claim a tax credit on just the first 200,000 electric cars a manufacturer sold. That meant that the most popular models lost the credit. The incentive did not restrict income or purchase prices.

The old tax credits also applied to plug-in hybrids and fuel cell vehicles, but not used vehicles.

President Biden signed the act into law on Aug. 1, 2022. Most of its provisions kicked in on Jan. 1, 2023. That created a brief window when the law required qualifying cars to be built in North America, but the 200,000-car-per-manufacturer limit still applied. If you bought an electric car between Aug. 16, 2022, and Jan. 1, 2023, it qualified for a credit only if it was built in North America by a manufacturer that hadn’t sold 200,000 or more qualifying cars.

Tesla and General Motors’ electric car tax credits were reinstated in January. So if you have your heart set on a Tesla Model 3 or perhaps a Cadillac Lyriq, now is the time to act.

List of 2023 Electric Vehicles That Qualify

According to the U.S. Internal Revenue Service, this is the latest list as of press time of electric and plug-in hybrid vehicles that qualify if purchased after Jan. 1, 2023. The site notes that several manufacturers had yet to submit information on specific eligible makes and models and for users to check back for updated information.

State and Local Incentives Near You

Though the federal government’s effort makes up the lion’s share of government EV discounts, some states and local governments offer incentive programs to help new car buyers afford something more efficient. These can be tax credits, rebates, reduced vehicle taxes, single-occupant carpool-lane access stickers, and exemptions from registration or inspection fees.

States like California and Connecticut offer broad support for electric vehicle buyers. However, Idaho, Kentucky, and Wyoming are among the states offering no support to individual EV buyers. The U.S. Department of Energy maintains an interactive list of state-level incentives, while Plug In America posts an interactive map of EV incentives.

Your Electric Utility May Help

Lastly, it’s not just governments that can help you with the cost of a new EV. Some local electric utilities provide incentive programs to help buyers get into electric vehicles. After all, they’re among the ones that benefit when you turn your fuel dollars into electricity dollars.

Some offer rebates on cars. Others offer discounts on chargers or install them free when you sign up for off-peak charging programs.

For example, the Nebraska Public Power District offers a $4,000 rebate to customers who purchase a new electric car.

Electric Car Guides:

Editor’s Note: This article has been updated for accuracy since it was originally published.