A federal EV program can save you thousands. How does it work and how do you apply?

Noor Adatia, The Dallas Morning News (TNS)

Electric vehicles are typically seen as expensive cars to own. But an updated, federal tax program designed to make them more affordable could credit you up to $7,500 for purchasing a new clean vehicle.

Throughout January, the government has been ironing out details of its new EV tax credit program, just as many Americans head into tax season. Some of the new changes, enacted by the passage of the Inflation Reduction Act, broaden the scope for eligibility, making more buyers and lessors qualify for some amount of tax credit.

For instance, starting in 2023, people who purchased used vehicles also qualify for a smaller credit amount.

Due to the program’s evolving requirements, understanding if your car qualifies for credit under the program — and how much money you can receive — can get complicated.

Here are your questions about the EV tax program answered, including why it’s in place, what’s new in 2023 and how to claim your clean vehicle tax credit.

What is its purpose?

When President Joe Biden passed the IRA bill in August 2022, he did more than just target rising inflation; he also signed off on various programs to encourage Americans’ sustainable living choices and lower their energy costs, including for electric vehicle owners, according to the White House.

The new federal EV credit program also strives to make clean cars more affordable for the average consumer, said Keith Barry, automotive writer at Consumer Reports.

“It seems that the way that the tax credits are designed, they are aiming to stimulate sales of vehicles made in North America, and also stimulate sales of affordable EVs,” Barry said.

The bill notably required that all vehicles must “undergo final assembly” in North America. It also removed the 200,000 vehicle cap for manufacturers, which previously made some ineligible for credit, making some Tesla, General Motor and Toyota models qualify for a tax reduction.

However, some sourcing requirements, including rules for critical minerals and battery components, remain unknown. The Treasury Department, which oversees tax administration, said it would issue more information sometime in March.

<p>Workers assemble R1T trucks Monday, April 11, 2022, at the Rivian electric vehicle plant in Normal, Illinois. (Brian Cassella/Chicago Tribune/TNS)</p>

Brian Cassella/Chicago Tribune/TNS

Workers assemble R1T trucks Monday, April 11, 2022, at the Rivian electric vehicle plant in Normal, Illinois. (Brian Cassella/Chicago Tribune/TNS)

What’s new in 2023?

For the first time, used electric vehicles are now eligible for credit of up to $4,000 or 30% of the final sale price — whichever is less.

In addition, used EVs do not have to be made in North America, bypassing the final assembly rule; however, they must sell for $25,000 or less, according to the IRS.

There are also spending requirements for new vehicles bought in 2023 — most cars cannot exceed $55,000, and vans, pickup trucks and sport EVs cannot surpass $80,000.

“The rules here cut out some of the most expensive vehicles from getting tax credit and some of the wealthiest buyers from getting a tax credit,” Barry said.

New to 2023 are also income requirements. For new EVs, buyers cannot make more $150,000 if single, $225,000 if head of a household and $300,000 for married couples.

For used EVs, income thresholds are even lower. Buyers cannot earn more than $75,000 if single, $112,500 if head of a household and $150,000 if filing jointly.

If these requirements seem restrictive, there’s another way to circumvent production and income requirements — through leasing an EV, Barry said. Starting this year, lessors can qualify for up to $7,5000 tax credit, and it’s up to them to decide whether or not the credit gets to the consumer.

Chris Harto, senior policy analyst at Consumer Reports, said in an email that leasing companies can dole out credit either as a lump sum or as a monthly reduction over the course of the loan.

“They have no legal obligation to pass along the credit, but competition in the marketplace will hopefully encourage them to do so,” he said.

Which cars qualify?

The IRS issued a list of qualifying new car makes purchased in 2023.

The index includes 13 manufacturers, ranging from Honda, Volkswagen, Ford Motors, Kia, Rivian and Subaru. Some automakers list specific models and years, while others have yet to submit their eligible makes.

How to apply:

According to the IRS, you can claim the credit by filling out Form 8936 with your tax return. The form requires reporting your qualifying car’s Vehicle Identification Number, among other things.

Barry noted this process might be easier in 2024 once requirements become more clear. The Treasury Department said that starting in 2024, buyers will be able to transfer the credit to dealers at the “point of sale,” which can directly reduce the price of their car.

“(2023) is a transition year,” he said. “Next year, things will be more settled, and people will be able to get that credit at the point of sale and will make things a lot easier.”

Because details won’t be finalized for a few months, you may want to purchase an EV soon — but this doesn’t doesn’t mean you should go out of your way to do so, Barry said. If you already have a car you’re interested in, it could be wise to finalize a purchase before March.

If you have lingering questions about how the credit works, Barry recommends you consult with a tax professional or accountant — and not your car dealer.

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