EV Tax Credits: How It Works, and What They Are?

The world is transitioning to a greener vehicle fleet, and many states are incentivizing the adoption of electric cars through various tax credits. Today, buyers of electric vehicles (EVs) have multiple ways to save money, either immediately or in the future. One such option is an electric vehicle (EV) tax credit, which benefits both consumers and the environment—it’s truly a win-win.

How do EV tax credits work? What are the requirements for electric vehicles to be eligible? And what does the 7500 tax credit mean? By the end of this article, you’ll have all the information you need to navigate EV tax credits.

Understanding EV Tax Credits

So, what exactly is the electric vehicle tax credit? The EV tax credit is a non-refundable tax credit that taxpayers receive when purchasing an electric vehicle.

In fact, the EV tax credit is a reduction in your tax liability by the amount of the credit. Additionally, as of January 1, 2024, this tax credit can also be applied as an immediate discount on the purchase price of an electric vehicle. This means that taxpayers can transfer the tax credit directly to the seller, reducing the upfront cost of the vehicle by the qualifying credit amount.

The main benefit of the EV tax credit is that it helps more people afford electric vehicles. It lowers the price of the car at the point of purchase, ensuring that electric cars are more affordable in the long run.

Beyond the financial impact, the EV tax credit also contributes to achieving climate goals. Replacing petrol vehicles with electric ones plays a crucial role in reducing greenhouse gas emissions, which account for nearly a third of all emissions. By driving demand for zero-emission electric vehicles, the tax credit helps reduce pollution from the transport system and promotes cleaner air.

How Does the EV Tax Credit Work?

To qualify for the EV tax credit, both the vehicle and the applicant must meet certain eligibility criteria. It’s the EV tax credit income limit for the taxpayer, as well as the price caps and production guidelines for the vehicle.

To qualify, a vehicle must be under the recommended price, which is no more than $80,000 for SUVs and pickup trucks and no more than $55,000 for sedans and cars. Used vehicles must be priced at no more than $25,000. The listed price does not include taxes and fees.

As for income limits, taxpayers must fall below a certain income limit for an EV tax credit. For example, to qualify for the new EV credit, annual income must be no more than $150,000 for a single person, $225,000 for the head of a household, or $300,000 for a family. To qualify for the used EV tax credit, an individual must earn no more than $75,000, a head of a household no more than $112,500, and a family no more than $150,000. However, it is important to note that if your income exceeds the EV credit income limit in one year but falls below the limit in another, you may still be eligible to claim the tax credit in the future.

How Is the EV Tax Credit Amount Determined?

The standard credit amount you can receive is up to $7,500 for new vehicles, but not every car qualifies for this full amount. So, how does the $7500 EV credit work in practice? The $7,500 credit is calculated based on several factors, including the vehicle’s assembly, source of components, and battery size. The base amount is $2,500, and the IRS considers these additional factors to determine the final credit, which typically adds up to around $4,000 in total.

By the way, if we are talking about buying a used vehicle, the tax credit is 30% of the vehicle price (but not more than $4,000). As for the requirements for used electric vehicles, they must be bought from a licensed dealer, be at least two years old, and be capable of being charged from an external power source.

How to Claim EV Tax Credit

Now that you know all about the tax credit, it’s time to talk about the process of getting it.

To claim the EV tax credit on your return, you must file a federal tax return and complete Form 8936 for the year in which the vehicle was purchased and put into service. When purchasing an EV from a dealership, ensure that the seller provides all the necessary information that will be required to claim the tax credit, such as seller information, date of sale, vehicle price and identification number, battery capacity, proof of tax credit eligibility of the vehicle model, and proof that you are the original owner of the vehicle.

If you choose to apply the EV tax credit to the dealer to receive an immediate discount on your purchase, you still need to report it on your annual tax return. In terms of documentation and information, you’ll also need to provide your Social Security number when you purchase the vehicle, as well as verify that your income falls within the required limits and that the car you are buying will be used for personal purposes.

Key Advantages of EV Tax Credits

The EV tax credit offers significant advantages not only to buyers but also to the environment and our country as a whole. So, let’s look at the key benefits of tax credits on EVs:

• Monetary Benefits for Consumers: The EV tax credit ensures that more people can afford electric cars, even those with lower incomes. While electric vehicles are becoming more affordable, they can still be out of reach for many buyers.
• Reduced Carbon Emissions: By promoting the adoption of electric vehicles, the tax credit helps reduce harmful emissions and combat high levels of air pollution. This contributes to improved public health and helps the nation achieve its climate goals.
• National Security: The more vehicles that run on electricity rather than gasoline, the more energy-independent the country becomes. This can be critical in times of energy crises or oil and gas shortages.

Final Thoughts

Incentives like EV tax credits play a crucial role in shaping the electric vehicle market. They not only provide financial benefits to consumers but also help to achieve long-term climate goals.

However, while an EV tax credit is a great way for taxpayers to save money on a vehicle purchase, there are many nuances to consider in the process of claiming the credit. Make sure you meet all the eligibility requirements for both buyers and the vehicles being purchased to take full advantage of this opportunity.