Here's How to Get a $7,500 IRS Tax Credit

This is one of the most lucrative tax credits, but there's a lot to know first.

As part of the Inflation Reduction Act 2022, the tax credit available on electric vehicle purchases has been improved for vehicles purchased in 2023 and beyond. Qualified EV buyers can get a credit of as much as $7,500, making the clean vehicle tax credit one of the most lucrative available to individual taxpayers in the United States.

However, the credit isn't just valuable -- it's also restrictive and complicated to qualify for. Here's a rundown of what you need to know about qualifying for the credit in 2023 and beyond.

Will you qualify for the clean vehicle tax credit?

There are two different sets of qualifications to consider if you're aiming for the $7,500 credit on a new electric vehicle -- whether you qualify for the credit and whether the vehicle does.

First, determine if you're eligible. The clean vehicle tax credit is available to individuals whose household income (modified AGI, or adjusted gross income) doesn't exceed the following thresholds:

• $300,000 for married couples filing jointly
• $225,000 for heads of households
• $150,000 for singles, married filing separately, and all other filers.

For purposes of this credit, you can choose to use your modified AGI in either the year in which you take delivery, or the year before.

For the vehicle to qualify for the credit, it must be a plug-in electric vehicle (EV) that has a battery capacity of at least 7 kilowatt hours, has a gross vehicle weight rating (GVWR) of less than 14,000 pounds, and must be made by a qualified manufacturer. And while it doesn't necessarily need to be manufactured by an American automaker, it does need to undergo final assembly within North America.

It's also important to note that plug-in hybrid vehicles can qualify, assuming they meet the battery pack requirement in the previous section.

Also, the MSRP of the vehicle can't exceed $80,000 for vans, SUVs, and trucks, or $55,000 for other vehicles including standard passenger cars. It's worth noting that the credit previously ran out after each manufacturer sold a certain number of electric vehicles, but this provision has been eliminated. For example, if you bought a Tesla in 2022, it wouldn't have qualified, but in 2023 it can (assuming it is under the MSRP limits).

How much can you get?

For vehicles purchased new in 2023, the maximum amount of the clean vehicle tax credit is $7,500, and most taxpayers who meet the requirements discussed in the prior section will get the entire credit. Without getting too technical, the short version is that the credit depends on the vehicle's battery capacity (in practice, some plug-in hybrids will get a lower credit), and will eventually depend on where the battery components were made once the IRS issues clearer guidance later in 2023.

It's also important to note that for the first time ever, used electric vehicles can qualify for a credit. Eligible buyers can get a credit equal to 30% of the sale price, up to a maximum of $4,000.

However, the used car EV credit is significantly more restrictive than the already-tough-to-get new EV credit. For one thing, the income limitations are half of those mentioned earlier for the new vehicle version (so, $150,000 for married couples, etc.). And second, the vehicle must have a sale price of $25,000 or less to qualify, have a model year at least two years earlier than when it was bought, and must be purchased from a dealer.

Next year it gets a little easier

Starting in 2024, the clean vehicle tax credit will be available immediately as a point-of-sale rebate through a car dealer or manufacturer, meaning you won't have to wait until you file taxes to get it -- the seller can simply deduct the $7,500 from the sale price of the vehicle.

A valuable tax break if you qualify

The biggest takeaway is that the clean vehicle tax credit can be lucrative, but it is also very restrictive. For example, most used EVs being sold in 2023 (especially Teslas) won't qualify because they sell for more than $25,000. So, before you rush out and buy your next vehicle with a big tax credit in mind, be sure you're familiar with the requirements.