The current U.S. administration has enacted several pieces of legislation that will affect your taxes this year. Many of them aim to reduce the deficit and effects of inflation through measures that combat climate change, lower the cost of healthcare, and increase taxation on large corporations. It also includes 200 new tax credits and incentives to decrease your taxable income. However, one of the most controversial and confusing credits is a provision for EV tax credits. So if you own an EV, or are thinking about buying one, here’s everything you need to know.
What Are the EV Tax Credits for 2023?
Last year, President Biden signed the Inflation Reduction Act into law on August 16, 2022. It provided $739 billion in funding to help ease the financial burden that inflation has placed on American taxpayers. But, it also has added new tax credits to encourage people to do more to protect the environment. This includes the EV tax credits for those driving “clean” vehicles.
However, there has been some uncertainty about who qualifies, how to claim it, and when certain measures will apply. While some initiatives took effect when President Biden signed the bill, legislatures have since revamped them with new requirements that took effect on January 1. While the IRS has been working to clarify the tax credit, many questions remain. In particular, there are some rules concerning the battery and other components that won’t be available until later this year.
As it stands, EV owners can claim up to $7,500 credit for new vehicles. But, lower credits may still apply to older models. The crux of the problem is the possibility that some EVs that are eligible for the credit now won’t be in the future. To help shed some light on this problem, the IRS has compiled the current list of vehicles that meet all requirements and qualify for the tax credit.
If you’re still confused – don’t worry – you’re not alone. There has been so much confusion surrounding the EV tax credits that the IRS has released a FAQs sheet to help sort through all the new changes.
What Qualifies as an Electic Vehicle (EV)?
To help everyone understand who qualifies for the EV tax credits, let’s review what we already know.
Who Qualifies?
The tax credit is available to individuals and businesses who have bought and put a new electric vehicle (EV) or fuel cell vehicle (FCV) in service this year. To claim the full credit, the purchase and delivery must have occurred after January 1, 2023. However, if you bought a qualifying vehicle after the Inflation Reduction Act was signed, you may still qualify for the 2022 credit.
Additionally, you must use the vehicle primarily in the US and have bought it for personal use, not resale.
Lastly, you must have an annual income that falls below these limits:
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- $150,000 for single filers
- $225,000 for heads of household
- $300,000 for married couples who file jointly
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What EVs Qualify?
If you have determined your eligibility as a taxpayer, the next step is to see if your EV meets the minimum requirements as well. While there is a long laundry list of specifications, here are the highlights for eligible vehicles:
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- The final assembly was completed in North America.
- It has a minimum battery capacity of 7 kilowatt hours (kWh).
- The vehicle weighs less than 14,000 lbs.
- It comes from a qualified manufacturer.
- The MSRP is less than $55,000. You can also claim the credit for an EV truck/van/SUV with a maximum MSPR of $80,000.
- If it is a used vehicle, it must have been purchased from a licensed dealer and have a value of less than $25,000.
While this is a lot of information to take in, there are tools to help you find the answers you need. The IRS has issued the current list of vehicles that qualify for the EV tax credits. All you will need is the VIN number to use the decoder tool to see if your specific vehicle qualifies.
If you don’t see your electric vehicle on the list, don’t panic just yet. They are still reviewing which vehicles’ components would qualify them for the deduction. Therefore, they will continue to update the list in the coming months. Even if your vehicle hasn’t been added yet, you could see it on the list soon.
How Can You Claim the EV Tax Credits?
One of the most important factors for eligibility has to do with the sourcing of materials, manufacturing, and assembly of EVs in North America. Many foreign vehicles that would qualify as “clean vehicles” will not be eligible for the tax credit because of this stipulation.
However, if you do see your electric vehicle on the official list, it’s fairly simple to add it to your tax return. You can claim up to a $7,500 EV tax credit using Form 8936 for the Qualified Plug-in Electric Drive Motor Vehicle Credit. Make sure to include the VIN number on this form and attach it to your tax return to claim the credit.
In addition to the specific models that qualify, there are a few other things you should be aware of. For example, the exact amount of the tax credit depends on other factors that affect the final calculation. Namely, what percentage of the components have been sourced and assembled in North America. Unfortunately, we are still waiting for final clarification on particular EVs that may still be eligible for the tax credit. Although legislators expect an announcement by March, there is a chance that the updated list may not come before the tax filing deadline.
Although there is always confusion when they make changes to the tax code, these credits could provide a huge break to EV owners. If you have any questions or concerns about the new legislation, it’s always a good idea to seek expert advice. Your financial advisor and tax preparer can help you navigate through uncharted waters and maximize your tax return.
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