Electric vehicles, typically referred to as “EVs,” are all the rage these days, not just because of environmental friendliness but also because of the significant financial incentives available to buyers. The Inflation Reduction Act of 2022 amended IRC § 30D for new clean vehicles and added IRC § 25E for previously owned EVs to strengthen the financial incentives for taxpayers considering an EV purchase.
The IRS recently published new procedural rules in the Treasury Regulations that go into effect July 5, 2024, with revised credits that can save taxpayers up to $7,500 on certain new EVs and up to $4,000 on certain previously owned EVs. Still, the rules surrounding these credits can be confusing for both experienced tax professionals and average taxpayers. So as the saying goes, buyers beware.
To make this process less perplexing, this blog explores the nuances of the current EV tax credits, with a focus on how they work, who may qualify, and common pitfalls to avoid. This blog will focus on the new rules for EVs that went into effect after the Inflation Reduction Act.
Understanding the Credits
The EV tax credit for qualifying new clean vehicles can be as much as $7,500, effectively putting cash in the hands of taxpayers as long as the vehicle and the buyer meet certain qualifications.
However, not all EVs qualify for the full $7,500 credit under the revised law. The amount a taxpayer may claim depends on many factors, including certain battery components and critical mineral requirements, the manufacturer’s suggested retail price (MSRP) of the EV, and the taxpayer’s modified adjusted gross income (MAGI). Therefore, taxpayers need to understand and verify both their vehicle’s eligibility and their personal income qualifications before making a purchase.
Although the credit is not refundable, you can use it to reduce the sale price of your vehicle at the time of purchase if you elect to transfer the credit to the dealer. In general, the value of the new vehicle credit is the lesser of your tax liability or $7,500. For example, if your tax liability is $6,000, the credit would reduce your liability down to $0, but you wouldn’t get the remaining $1,500. Taxpayers can’t receive the difference as a refund from the IRS or carry it over to the next tax year. I discuss this in more detail in Claiming the Credits.
For both new and previously owned EVs, the tax credit is available for purchases through December 31, 2032, so unless the law changes, there’s no rush to purchase a vehicle.
Transferability of the Electric Vehicle Credits
A unique aspect of the EV tax credits for vehicles placed in service on or after January 1, 2024, is its transferability to dealers. Some taxpayers choose to transfer their expected credit amount and apply it directly to the vehicle’s down payment at the time of purchase. This option lowers the cost of the vehicle and may simplify the process because the dealer handles the initial tax credit qualification paperwork for you with the IRS. However, this convenience doesn’t mean taxpayers can be cavalier when it comes to reporting the credit for their next filed tax return. If you elect to transfer the credit and for some reason do not meet certain qualifications (such as the MAGI limitation), you may have to repay the amount of the credit you received.
Taxpayer Qualifications
To qualify for the tax credit, you must meet several requirements, including that your MAGI for the year in which you place the EV in service—or for the previous tax year (whichever is less)—must fall below specific thresholds. The tax code defines MAGI for this purpose as adjusted gross income (AGI) increased by amounts excluded under IRC §§ 911, 931, or 933.
New Electric Vehicles
If you’re considering purchasing a new EV, you may be able to get a tax credit of up to $7,500. If your EV is a van, SUV, or pickup truck, the MSRP must be $80,000 or less. For all other new EVs, the MSRP cap is $55,000. The taxpayer’s MAGI thresholds for new vehicles are $300,000 for joint returns, $225,000 for heads of household, and $150,000 for everyone else. Taxpayers can only claim the new EV credit once per vehicle, based on the vehicle identification number (VIN).
Previously Owned Electric Vehicles
If you’re considering purchasing a previously owned EV for $25,000 or less, the tax code allows for a credit of either $4,000 or 30 percent of the sale price, whichever is less. No credit is available for previously owned vehicles whose sale price exceeds $25,000. As with the new vehicle credit, your MAGI must not be above a certain amount, which is $150,000 if you file a joint return, $112,500 for head of household, and $75,000 for all others.
This credit applies only with the first transfer of the previously owned EV, so if it was already sold once after August 16, 2022 (the date of enactment of the Inflation Reduction Act), then you can’t claim this credit even if the previously owned EV is new to you and regardless of whether the former owner claimed the EV credit in the prior transfer. Further, to qualify for the credit, you must purchase the EV for personal use, not for resale.
Note that you can only get the previously owned EV tax credit once every three years. Also, you can’t be a dependent on another person’s tax return. Read all the qualifications for Clean Vehicle Tax Credits.
Who’s Responsible for Affirming the Buyer’s Modified Adjusted Gross Income?
While the dealer must verify a vehicle’s eligibility, it is not responsible for attesting to the buyer’s qualifications. Instead, taxpayers need to make an attestation to the dealer that they meet the threshold MAGI requirements. This distinction places the onus on taxpayers, not the dealers, to ensure they meet the income criteria before claiming the credit.
Claiming the Credits
Taxpayers have two avenues to claim the credit: (1) at the point of purchase or (2) on their tax return. The first involves transferring the credit to the dealer to apply against the purchase price, while the second involves claiming the credit when filing their federal income tax return. Either way, taxpayers need to file Form 8936, Clean Vehicle Credits (or successor form), and the corresponding Schedule A with their federal income tax return for the year they placed the vehicle in service.
Buyer Beware: Common Pitfalls for Taxpayers Claiming the Electric Vehicle Credits
The EV tax credits can present unexpected challenges for taxpayers. Here are three common issues you might encounter when claiming the credits. Watch out for these pitfalls, as you might miss an opportunity to take the credits or perhaps worse, get a surprising tax liability.
Modified Adjusted Gross Income Qualification Ceiling
A possible stumbling block for taxpayers is the MAGI qualification ceiling. Remember that the lower of the current year’s MAGI or the previous year’s MAGI must be less than the applicable thresholds (depending on your filing status). Taxpayers whose MAGI was too high for the previous year might estimate their MAGI for the current tax year to fall within the eligible range when purchasing an EV only to find that it exceeds the threshold by the end of the year. This miscalculation can lead to the IRS recapturing the credit, resulting in an unexpected tax bill.
To avoid this pitfall, consider these steps:
- Carefully plan and proactively monitor your income throughout the year.
- Before purchasing an EV with the intent of claiming the credit, review your financial situation and estimate your MAGI. You may wish to consult a qualified tax professional to understand the elements of your MAGI and anticipate any changes to your situation or the tax laws for the current year.
- If your income is variable or you expect it to increase, plan conservatively to avoid surpassing the qualification ceiling and running the risk of having to repay the tax credit.
Vehicle Qualifications
Another issue arises when taxpayers purchase an EV they believe qualifies for the credit, but it doesn’t meet the various criteria under the law. To avoid this pitfall, never leave the dealership without an accepted Clean Vehicle Seller Report from the IRS (Form 15400), which confirms the vehicle’s eligibility for the credit. The seller submits these forms directly to the IRS, and should take care of this paperwork for you at the dealership.
For EVs placed in service on or after January 1, 2024, the seller must submit all reports through the IRS Energy Credits Online (ECO) portal. Sellers must also provide the buyer with a copy of the accepted seller report. Even though the rules give the seller three calendar days to provide a copy of the accepted report, you can ask for your copy before leaving the dealership. In almost all cases, the ECO portal should inform the seller whether the IRS accepts or rejects the Seller Report before your departure.
Hold on to your copy of the Seller’s Report from the IRS, as it’s your proof that you claimed the credit in good faith.
The government provides a list of qualified vehicles at FuelEconomy.gov.
Eligibility Issues Related to Vehicle Identification Numbers
Sometimes, a particular vehicle that one would think should qualify based on its specifications comes back from the seller’s submission as ineligible based on the VIN. This discrepancy may occur if the manufacturer hasn’t yet reported that particular VIN to the IRS or if the vehicle was originally placed in service by another taxpayer and later returned.
If you encounter this issue, you can request that the dealer contact the manufacturer to correct the oversight. While direct dealers can often leverage their relationship with the manufacturer to get this fixed quickly, independent dealers might face challenges, but either way, proactive communication is key.
Checklist of Things to Know
- Make sure your current MAGI is below the thresholds based on your filing status and determine whether you’re buying a new or previously owned EV.
- Don’t leave the dealership without getting a Clean Vehicle Seller’s Report. The IRS will give this report directly to the seller through the ECO online portal.
- If you know the specific vehicle you want qualifies for the credit, but the IRS report comes back as not qualified, the manufacturer of the EV might not have reported that specific VIN to the IRS. Ask your dealer to contact the manufacturer to fix this problem.
- Remember, you still must report the credit on your annual tax return, even if you transferred the credit to the dealer as a down payment. In such a case you are merely reporting the transferred credit, not claiming it twice.
Conclusion
Taxpayers shouldn’t let the perceived complexity of the new and revised EV tax credits prevent them from taking the credits if they’re eligible. By understanding the qualifying criteria, the process for claiming the credit, and common pitfalls, taxpayers can make informed decisions that align with their financial and environmental goals and be happy with their decision to purchase an EV.
Remember that the EV landscape is still evolving, so be sure to stay informed to maximize your benefits of EV ownership.
Resources
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.