It’s Electric: Navigating the New Federal EV Tax Credit

The new electric vehicle (EV) tax credit is certainly a step in the right direction toward moving to a greener future, but it sure can be complicated to navigate. Let’s walk through the steps to determine whether this is a credit you could qualify for and, if so, how to meet the requirements to maximize your tax credit.

New electric vehicles placed into service January 1, 2023, or later can qualify for a $7,500 tax credit if the car meets certain criteria. Before delving into the details on the new EV tax credit requirements, let’s first start with the definition of a tax credit:

A tax credit reduces your tax liability dollar for dollar. This is different from a deduction that reduces your taxable income. A tax credit, therefore, provides a lot more bang for your buck. If, for example, when you file your taxes, your total federal tax liability is $12,000, with a $7,500 tax credit, you would only owe $4,500 in taxes for the year. If you had already paid $12,000 in federal taxes throughout the year, you’d get a refund of $7,500 when you file.

An additional benefit of the tax credit is that you still receive the credit even if you finance your vehicle. This could result in net positive cash flow in the first year of purchasing an EV.

Income Limitations

First and foremost, your income must be under certain limits to qualify for the tax credit on purchases of new electric vehicles. The IRS allows you to use the lesser of the two between your income for the year you take delivery of the vehicle or your income for the previous tax year.

To be eligible for the new EV tax credit, the Modified Adjusted Gross Income (MAGI) for married couples filing jointly must be less than $300,000 and less than $150,000 for single filers.

Vehicle Requirements

Starting in 2023, the Clean Vehicle Credit (CVC) provisions removed manufacturer sales caps and limited the vehicles that qualify for the credit by MSRP. The CVC also added complex requirements around the sourcing of materials for EV batteries as well as where the vehicle is manufactured for it to qualify for the credit.

• MSRP: Vans, SUVs, and pickup trucks must have an MSRP of $80,000 or under; all other vehicles must have an MSRP of $55,000 or under.
• Critical minerals: To be eligible for the $3,750 critical minerals portion of the tax credit in 2023, at least 40% of the minerals used for the battery must be extracted from or processed in North America or a US free trade partner. This percentage increases by 10% each year until it reaches 80% in 2027.
• Battery components: To be eligible for the $3,750 battery components portion of the credit in 2023, at least 50% of the value of the battery’s components must be manufactured in North America. The percentage increases by 10% each year until it reaches 100% in 2029.

The criteria described above makes it challenging to determine whether a vehicle qualifies for the credit. The best way to figure out if a vehicle will qualify under these new requirements is to take the following steps:

1. Reference the IRS website list of manufacturers for the makes and models of vehicles that may qualify for the credit.
2. When you find a specific vehicle from the IRS-approved make and model list, use the Department of Energy’s VIN Decoder to determine if the vehicle was assembled in North America.

While the list of vehicles that currently qualify is somewhat limited, the hope is that many more vehicles will become eligible over the coming years as car manufacturers adjust production to meet this criteria.

State and Local Tax Credits or Incentives

In addition to the federal tax credit, you may be eligible for state and/or local incentives. For example, Washington state offers a sales tax exemption up to a certain sales price for both new vehicle and used vehicle purchases. Under current tax laws, A new electric vehicle with a sale price of $45,000 or less would be exempt from paying sales tax on $15,000 to $20,000 of the vehicle’s price. With a state tax of 6.5%, this could result in savings of up to $1,300 for buyers of EVs in Washington compared to a non-electric vehicle.

I recommend researching your state and local incentives ahead of going to a dealership to understand whether it is the dealer’s responsibility to provide the credit at the time of sale or the buyer’s responsibility to apply for the credit after the sale.

Fuel Savings

It is significantly less expensive per mile to drive an electric vehicle versus a gasoline vehicle. At current gasoline prices and local utility rates for electricity, it would cost about $1,600 to drive 10,000 miles per year in a gasoline-fueled vehicle. Driving the same 10,000 miles is estimated to cost approximately $400 per year for an electric vehicle charging at home. This example gives us a $100/month of fuel savings—multiplied over five years, you would save $6,000 on fuel.

Total Savings

It’s no secret that electric vehicles are more expensive than their gasoline-dependent counterparts. When you add up the federal credit, state sales tax exemptions or other incentives, and fuel savings, the case for going electric becomes a lot more compelling.

My partner and I recently got our first electric vehicle and do most of our day-to-day driving in our EV. Beyond the dollars and cents, we feel there is something incredibly satisfying about driving an electric vehicle, not to mention that fact that electric vehicles are very zippy and fun to drive. The future is electric, and that transition is getting easier and easier with the introduction of more credits and incentives. If you have questions about how to navigate the federal tax credit, don’t hesitate to reach out.

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.