Can You Score Tax Credits for Buying an Electric Vehicle? Ask Yourself These Questions to Find Out

If you're thinking about buying an electric vehicle, you need to read this.

On Aug. 16, 2022, President Biden signed the Inflation Reduction Act into law. Among other things, this law created a new tax credit for electric vehicles. The tax credit is worth as much as $7,500 but you must meet certain requirements in order to be eligible for it.

Before you drain your bank account or apply for a car loan to buy an electric car in order to benefit from generous tax breaks, you'll want to ask a few key questions in order to make sure you qualify for the savings.

How much money do you make?

Starting in 2023, there are caps on the amount of money you can make in order to qualify for the electric vehicle tax credit. You can claim the credit if you are a single tax filer with under $150,000 in earnings or if you claim married filing jointly status on your tax return, you can claim the credit with an income up to $300,000.

The Inflation Reduction Act also created a second tax credit for used electric vehicles, although the maximum value of this credit is $4,000 or 30% of the total cost of the vehicle. If you want to earn the credit for the purchase of a used car, your income will need to be under $70,000 as a single filer or $15,000 as a married joint filer. The income test applies to either the current or prior year (whichever is lower) and looks at your modified adjusted gross income.

How much do you pay in taxes?

The tax credit for electric vehicles isn't refundable. As a result, it can reduce your tax bill down to $0 but not to less than that. So unless you pay at least $7,500 (or $4,000) in federal taxes, you won't be able to claim the full value of the credit.

This means the credit is most valuable to higher earners who actually pay a substantial amount of taxes rather than to lower income people who may have lower IRS bills or even get money back.

Does your vehicle qualify?

There are some pretty strict requirements that must be followed in order for your vehicle to actually qualify you for these credits. Here are some of the rules:

• Your vehicle must be assembled in North America
• The maximum price of the electric SUV, van or truck you are buying must not exceed $80,000 and the maximum price of an electric car you're buying must not exceed $55,000
• Starting late in 2023 and 2023, the components and minerals of the car battery must come from a country that is involved in a free trader agreement with the U.S.

If you are not sure if a vehicle that you are interested in will qualify, this VIN decoder will help you to see where the vehicle is manufactured. You can also check out a complete list of qualifying vehicles on the Department of Energy website.

Be sure to check the fine print carefully and confirm with your dealership and/or your accountant if a credit qualifies because you don't want to buy a car expecting a tax break, only to find an issue that prevents you from claiming it.