The Inflation Reduction Act, enacted in August 2022, significantly changed the qualifications for and calculation of the tax credit available for the purchase of an alternative fuel vehicle (electric and fuel cell vehicles). The Act created the Clean Vehicle Credit with one provision effective upon enactment and the remaining provisions phased in beginning in 2023. As a result of enactment, many vehicles that previously qualified for the credit earlier in 2022 no longer qualify and fewer vehicles will qualify for the full credit after April 18, 2023. Significant changes and their effective dates are discussed below.
The IRS has updated its FAQ sheet to reflect guidance issued in 2023.
The Department of Energy has compiled a list of eligible vehicles based on their delivery dates as the eligibility requirements changed for pre and post-Aug 17, 2022 and pre and post-April 18, 2023 deliveries: Department of Energy – Tax Incentives
Provisions Effective August 16, 2022
- Eligible vehicles must have a final assembly point in North America.
- The Department of Energy has compiled a list of qualified vehicles: List of Vehicles with Final Assembly in North America. Note, some models are assembled in North America and other locations. A vehicle’s VIN can be used to look up the final assembly point: VIN Decoder.
- The requirements above and below may not apply if the vehicle was subject to a binding purchase contract in effect prior to August 16, 2022 and delivered after that date.
Provisions Effective January 1, 2023
- 3/31/23 Update – The maximum Clean Vehicle Credit is $7,500 but comprised of two components. A $3,750 credit if the vehicle meets the requirements for sourcing of critical minerals used in the battery and a $3,750 credit for sourcing of battery components. These regulations will go into effect April 18, 2023 for all vehicles delivered after April 17, 2023, even if the vehicle was purchased prior to that date. For more information, see Manufacturers and Models for New Qualified Clean Vehicles Purchased in 2023 or After.
Caution: Vehicles listed on this website qualify under the pre-April 18th requirements. The website will be updated after the post-April 17th requirements are in effect. Fewer vehicles will qualify for the full or partial credit so it will be more costly to purchase a vehicle after April 17th.
- Eligible vehicles must have a suggested retail price of under $55,000 for cars and $80,000 for SUVs, vans, and pickup trucks.
- 2/3/23 Update – the IRS changed the definition of vans, SUVs, and trucks and is now using the EPA’s Fuel Economy Labeling Standard which expands the list of qualifying vehicles (view the list of qualifying vehicles here).
- A separate credit is available for commercial vehicles (trucks). The credit is the lesser of: 15% of the vehicle’s cost (30% if fully electric) or 100% of the incremental cost of the vehicle or $40,000.
- Qualified taxpayers must have adjusted gross income (AGI) below $300,000 for joint tax returns, $150,000 for single filers, and $225,000 for head of households. The AGI test applies to the lowest income year including the year of purchase or the prior year.
- These are cliff requirements with no phase-out. If a taxpayer’s AGI exceeds the maximum by $1 they lose the entire credit, not just a portion.
- The manufacturer phase-out based on vehicle sales is repealed so models from Tesla, GM, and Toyota will qualify if all other requirements are met.
- A new credit is available for business-use vehicles (cars, SUVs, trucks). The credit is the lesser of: 15% of the vehicle’s cost (30% if fully electric) or 100% of the incremental cost of the vehicle. The credit is capped at $40,000 if the gross vehicle weight exceeds 14,000 pounds or $7,500 if the gross vehicle weight is under the limit. The requirements for assembly location, critical minerals, and battery components do not apply to qualify for this credit.
- The purchase of a used vehicle can qualify for a credit equal to the lesser of $4,000 or 30% of the purchase price:
- Purchase price cannot exceed $25,000
- Vehicle must be at least two years old
- Buyers Adjusted Gross Income cannot exceed $150,00 for joint tax returns, $75,000 for single filers, and $112,500 for head of household
- Sourcing requirements for critical minerals and battery components will not apply.
Provisions Effective January 1, 2024
- Taxpayers can apply the credit towards vehicle purchase at the time of purchase. No need to wait until a tax return is filed to get the benefit of the credit.
- Vehicles with batteries from China will not be eligible.
- The required sourcing percentages for critical minerals and battery components increase annually.
Provisions Effective January 1, 2025
- Vehicles using batteries with minerals from China will not be eligible for the credit.
If you are currently considering the purchase of a vehicle eligible for the credit, it is important that you consider the rules applicable next year as your credit could be significantly reduced or eliminated. Please contact us to discuss how these new credit rules can impact you.