At first glance, it may appear the tax credit of up to $7,500 for buying a new electric vehicle (EV) included in the Inflation Reduction Act (IRA of 2022) is just a continuation of the existing credit for purchasing a plug-in vehicle. However, there are significant differences between the two that may make it difficult for some EV buyers to take advantage of the new credit.
Before the enactment of the IRA of 2022 on Aug. 16, 2022, the EV credit was known as the qualified plug-in electric drive motor vehicle credit. The credit for each new vehicle was $2,500 plus $417 for each kilowatt hour of battery capacity above 5 kilowatt hours. That credit was limited to $7,500 per vehicle and began phasing out when a manufacturer sold at least 200,000 qualifying vehicles in the U.S.
The IRA of 2022 replaced the qualified plug-in electric drive motor vehicle credit with what is called the clean vehicle credit (CVC). While both credits are intended to give U.S. motor vehicle buyers an incentive to purchase an EV, the new credit places additional restrictions on who qualifies and which purchases are eligible. In the following sections, we will provide a breakdown of the criteria you must now satisfy to qualify for the new EV credit.
The new CVC credit can be claimed from Jan. 1, 2023, until Dec. 31, 2032, and the IRS has released transitional guidance for 2022 EV purchases.
Who qualifies for the CVC?
Taxpayers must meet income guidelines to claim the credit on EV purchases. Households with a modified adjusted gross income of up to $300,000 (MFJ, QW) ,$225,000 (HOH) or $150,000 (all others) qualify for the credit.
Which vehicles are eligible for the CVC?
Only battery powered cars manufactured in North America with a manufacturer’s suggested retail price (MSRP) below $55,000 are eligible for the credit. Vans, SUVs and trucks that have an MSRP of up to $80,000 are also eligible.
Additionally, for 2023 a vehicle must have a battery that was manufactured in North America and constructed of at least 40% with materials that are either manufactured or sourced in the U.S. or in countries with a free trade agreement with the U.S. That amount increases by 10% each year until it reaches 100% for 2029. The value of the components contained in a battery must be 50% for vehicles purchased in 2023 with that number rising to 100% by 2028.
It should be noted that the MSRPs of many of the EVs sold in the U.S. do not currently qualify for the CVC because they are either too expensive or do not use enough U.S.-sourced materials in their batteries. Consumer Reports has published a list of EVs that currently do and do not qualify for the credit based on MSRP. However, the publication notes that it could not determine which of those vehicles had batteries that qualified for the CVC. The IRA of 2022 states that the government must develop guidance on battery requirements by the end of 2022.
Do plug-in hybrid vehicles still qualify?
Plug-in hybrid EVs will qualify for the CVC if they meet the above-listed requirements for plug-in eligibility and are equipped with a battery with more than 7 kilowatts of capacity.
How is the CVC calculated?
For vehicles eligible for the CVC, $3,750 of the credit amount is based on the fact the battery was manufactured in North America. The remaining $3,750 of the credit is based on the battery meeting the sourcing requirements (40% of materials from the U.S. in 2023and 50% of component value).
Do leased vehicles qualify for the credit?
Taxpayers who lease eligible EVs can’t claim the CVC.
How do you claim the CVC?
Taxpayers who qualify for the CVC can claim the credit at the point of sale when they purchase their vehicle from the dealership. If you do not claim it at the time of purchase, or the dealership does not offer an immediate credit, you can still claim the CVC on your annual tax return.
What if I purchased an EV before the IRA of 2022 was enacted but it was delivered after Aug. 16?
According to the IRS’s transition rule, if you entered into a written contract to purchase a qualifying EV before Aug. 16, 2022, but did not take possession until after that date, you may claim a credit based on the rules for the qualified plug-in electric drive motor vehicle credit that were in place before that date. In essence, the rules allow you to claim the credit if you have already signed a contract to purchase a vehicle manufactured outside of North America if it otherwise qualifies under the old rules.
The rules state that the contract must be binding, which means it is enforceable under state law and does not include a limit on damages. Additionally, the IRS notes that a significant non-refundable deposit or down payment may indicate that a binding contract is in place.
What about 2022 EV purchases after Aug. 16?
Taxpayers who purchase and take possession of a qualifying EV after the IRA of 2022 was enacted on Aug. 16, 2022, but before Jan. 1, 2023, can claim an EV credit based on the rules that were in place prior to the IRA of 2022’s enactment. Applicable rules include the manufacturing cap on vehicles sold. Again, this allows you to claim the credit for vehicles manufactured outside of North America if the vehicle otherwise qualifies under the prior rules.
Do used EVs qualify for the CVC?
While, previously, the purchase of used EVs did not qualify for a tax credit, the IRA of 2022 includes a provision allowing those who purchased used EVs that do not exceed $25,000 to claim a tax credit. The credit is the lower of $4,000 or 30% of the EV’s sale price. However, you can only claim a tax credit for a used vehicle if it is purchased from a dealership.
The IRS and the U.S. Department of Treasury have said they will continue to release information on the CVC and other tax provisions included in the IRA of 2022. NATP will work to keep its members informed of any announcements related to the CVC that will affect them or their clients. To learn more about becoming an NATP member, go to natptax.com/join. New members can use the code 22SOCIAL to waive the $25 new member application fee.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.