How Does the Electric Car Tax Credit Work?

Drivers of electric vehicles can benefit from the federal electric vehicle tax credit. This credit motivates drivers to choose electric cars, which are more fuel efficient than gas-powered vehicles. Since EVs can be more expensive than traditional internal combustion vehicles, the federal government offers an incentive of up to $7,500 in tax credits to drivers who purchase EVs to close the expense gap between electric and gas cars. In addition to these breaks offered at the federal level, many states provide additional tax credits to drivers who choose EVs.

Understanding how the electric car tax credit works, who can qualify for it, and how to get it can help you access these tax breaks if you are looking to purchase a new or used EV.

What Are Electric Vehicle Tax Credits?

Taxes by Pictures of Money is licensed with CC BY 2.0

Electric vehicle tax credits are benefits that drivers gain access to when they purchase a qualifying EV. These tax credits are nonrefundable and apply to vehicles that use a battery propulsion system that operates from an external power source rather than a traditional combustion engine. Drivers can qualify for this tax credit by purchasing either a fully electric vehicle or a plug-in hybrid model, but only if the vehicle meets certain standards for qualification. The credits you’re eligible for may vary based on factors like whether you buy a new, used, or hybrid EV.

How Does the Electric Car Tax Credit Work?

The electric car tax credit works by reducing the taxes you owe on your annual federal tax return. For example, if you owe $8,000 in taxes to the federal government but buy an EV that qualifies you for a $7,500 credit this year, the credit reduces the taxes you owe to only $500. To claim your credit, you need to complete Form 8936 and submit it as part of your tax return.

Be aware that the federal EV tax credit is nonrefundable. This means that you can only apply the tax credit to your return in the year you made the purchase. Additionally, if your EV credit is more than what you owe in federal taxes for the year, you won’t receive the difference in the form of cash, check, or additional credit. You also can’t roll the difference over to the next year.

Which Vehicles Qualify for the Electric Vehicle Tax Credit?

Not all EVs qualify for the federal tax credit, and the vehicles that qualify change over time. For example, the Inflation Reduction Act of 2022 limits which EVs are eligible for the tax credit based on their location of final assembly. This act restricts which vehicles qualify for the EV tax to those that have their final assembly completed in North America. Since some EV models go through assembly in multiple locations, they may not qualify under the new tax credit legislation. This restriction is meant to encourage buyers to purchase domestically manufactured vehicles.

Prior to the Inflation Reduction Act, EVs needed to meet other requirements, like having a battery size of at least 5 kilowatt-hours and a curb weight under 14,000 pounds, to qualify. These restrictions may no longer apply to vehicles purchased under the new legislation. Under the Inflation Reduction Act, all EVs, plug-in hybrid EVs, and some other “clean” vehicles like hydrogen fuel cell vehicles become eligible for the tax credit as long as they meet the other standards determined by the Environmental Protection Agency. The EPA maintains an updated list of qualifying vehicles.

If you’re thinking about buying an EV and hope to qualify for the EV tax credit, it’s important to refer to the EPA’s website for updates about how recent legislation may affect your eligibility. You may also wish to contact a tax professional or reach out to one of our qualified professionals at Applegate Chevrolet for more information. We’ll help you understand the requirements and stay up to date on legislative changes that could affect your eligibility.

Who Qualifies for the Electric Vehicle Tax Credit?

Not all buyers may qualify for the EV tax credit. Under the Inflation Reduction Act, you can only qualify for the EV tax credit as a single filer when buying a new EV if your modified adjusted gross income is $150,000 a year or less. For joint filers, your modified adjusted gross income must be $300,000 a year or less, while the limit for heads of households is a MAGI of $225,000 or less.

Buyers looking to purchase a used car that qualifies for the EV tax credit under the Inflation Reduction Act may be subject to additional income restrictions. As a joint filer, your MAGI must be $150,000 or less in the year of purchase for you to qualify for the tax credit on the purchase of a used EV. For single filers, the limit is $75,000 per year, and heads of household can’t exceed a $112,500 threshold.

Since buyers with incomes that surpass these limits are less likely to need an incentive to assist them in covering the costs of a new EV, they are excluded under the new act.

Are There Any EV Incentives for Michigan Drivers?

Currently, there are no EV incentives for Michigan drivers. However, a proposed plan could give Michigan drivers a $2,000 tax credit on the purchase of a new EV along with up to a $500 rebate for installing an at-home charging unit to supplement the cost of purchasing a new EV. These rebates would be in addition to the federal tax credit on qualifying electric vehicles, helping buyers knock as much as $10,000 off the cost of a new electric vehicle. The rebate plan is still undergoing the legislative process at the time of writing this blog post.

You can learn more about local laws and incentives that may affect Michigan residents through the Alternative Fuels Data Center published on the United States Department of Energy website.

Want to know more about how the electric car tax credit works? Stop by Applegate Chevrolet or contact us today to have your questions answered. Our helpful professionals are happy to discuss state and federal tax incentives that could affect your purchase of a new or used electric vehicle.