How to Get The Biggest Electric Vehicle Tax Breaks

You could get $7,500 in EV tax incentives.

The newly passed Inflation Reduction Act of 2022 changed the requirements and tax credit amounts for electric vehicles. The Electric Vehicle Tax Credit can be worth up to $7,500 and it's available for all-electric cars or plug-in hybrid vehicles. The credit amount varies based on battery capacity -- so make sure you know how much your car has before buying! Here's what you need to know.

How the EV tax credit works 

The electric vehicle (EV) tax break is getting more people interested in buying cleaner cars. The credits reduce the amount of income taxes you owe. So if your total liability last year was $10,000, the $7,500 EV credit would reduce the amount you owed to $2,500. A tax credit reduces the amount of taxes you owe dollar for dollar, so you can save up to $7,500. A deduction on the other hand reduces the amount of your taxable income, so typically a credit saves you more money.

It is important to understand that if the taxes you owe are less than the credit, then you will only save on that amount. For example, if you owe $3,500 in income taxes this year, you will only qualify for $3,500 and any unused tax credit will not carry over to the next year. Buyers will need to have a federal tax liability to get full or partial benefits. 

One big change under the new EV laws is that you can receive the credit upfront at the dealership. As long as the dealer is registered with the U.S. Treasury, you can transfer your credits to the dealer and get the tax credit when you buy the EV. In the past you could only receive it when you filed your tax return. However, you will have to wait until 2024 before this kicks in.

What are the other requirements?

The Inflation Reduction Act of 2022 added multiple requirements to qualify for the tax credit. The final assembly of the vehicle must be in North America. The U.S. Department of Energy has created a list of eligible vehicles. There are two additional requirements: the battery's components and materials must be sourced in countries with which the U.S. has a free trade agreement, and part of the battery must be manufactured and assembled in North America. You can lose half the tax credit's value -- up to $3,750 -- if you don't meet one of the requirements or the whole amount if you don't meet both. 

To be eligible for the credits, there is both a cap on the price of the EV as well as a cap on your income. The MSRP of electric vans, sport utility vehicles, and pickup trucks must be below $80,000. All other vehicles must be below $55,000. To qualify for the credit your modified adjusted gross income (MAGI) must be less than:

• $300,000 for joint filers
• $225,000 for head of household filers
• $150,000 for single filers

Used vehicles qualify

One big change from the past is that used EVs now qualify for up to a $4,000 credit. The cost of the car must be under $25,000, be two model years old, and be purchased at a dealership. The vehicle only qualifies for the credit once in its lifetime and individual buyers must make $75,000 or less, $112,500 for heads of households, and $150,000 for joint return filers. The credit ends in 2032.

The Clean Vehicle Credit was passed with the goal of reducing emissions and improving air quality. Hopefully this credit will encourage more people to buy electric or hybrid vehicles, which produce significantly fewer emissions than traditional gas-powered cars. There are many major changes for new EV tax credits so make sure you do your research before shelling out the big bucks on a car loan!