What You Need to Know
- Taxpayers who bought a qualified clean vehicle last year can file for a sizable credit during the coming tax season.
- A new rule means those purchasing vehicles this year can get the financial benefit up front as a rebate.
- With the rebates and credits, there are income thresholds and price limitations to keep in mind.
A policy adopted by the Internal Revenue Service under the Inflation Reduction Act of 2022 means that people who bought new electric vehicles during 2023 are eligible for a tax credit as high as $7,500 when they file their taxes this year. Used electric car buyers, meanwhile, can qualify for up to $4,000 in tax breaks.
Taxpayers who qualify can claim the credit on tax returns filed ahead of April 15, while those who make such a purchase this year will benefit from a rule change allowing them to choose between claiming a nonrefundable credit on their tax returns in 2025 or transferring the credit to the dealer to lower the price of the car at the point of sale — effectively claiming their credit as an up-front rebate.
According to the IRS, the new rebate approach available this year will do away with taxpayers having to wait until the following year to claim the benefit on their tax returns, potentially making the credit more attractive at a time when the federal government and many states are aiming to incentivize cleaner transportation alternatives.
Taxpayers interested in learning about the clean vehicle credit can reference a newly updated FAQ document published in late December by the IRS. As the document details, the Inflation Reduction Act of 2022 made several important changes to the prior tax credits provided for qualified plug-in electric drive motor vehicles purchases, including adding “fuel cell vehicles” to the clean vehicle credit.
The law also added new credits for previously owned clean vehicles and for commercial clean vehicles.
Who Can Claim the Clean Vehicle Tax Credit
As the IRS spells out, taxpayers may not claim the credit if their modified adjusted gross income exceeds certain thresholds. This limitation is based on the lesser of their modified AGI for the year that the new clean vehicle was placed in service or for the preceding year.
The relevant modified AGI thresholds are as follows:
- Married filing jointly or filing as a qualifying surviving spouse or a qualifying widow(er): $300,000.
- Head of household: $225,000
- All other taxpayers: $150,000
For these purposes, modified AGI is the amount from line 11 of Form 1040 plus “any amount on line 45 or line 50 of Form 2555, Foreign Earned Income,” as well as any amount excluded from gross income because it was received from sources in Puerto Rico or American Samoa.
If a partnership or an S corporation place a new clean vehicle in service and the new clean vehicle credit is claimed by individuals who are direct or indirect partners of that partnership or shareholders of that S corporation, the modified AGI thresholds apply to those partners or shareholders.