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How to Claim the EV Tax Credit

How to Claim the EV Tax Credit

Businessman-Calculating-Invoice

The 2023 EV tax credit is one of the best ways to minimize your tax liability. But claiming it isn’t as simple as purchasing any electric vehicle. You have to buy an EV from specific manufacturers, and many other requirements must be met before you can claim the EV tax credit.

If you want to save on tax with an electric car but don’t know how to claim the EV tax credit alone, read this guide! In it, we’ll review the federal EV tax credit’s requirements, what the EV federal tax credit form looks like, if the credit is retroactive, and talk through everything you need to know about applying.

What Is the Federal EV Tax Credit?

Interested in owning an electric vehicle? There’s never been a better time to jump in! Between the increasing affordability of electric vehicles, superior fuel economy, and unique tax benefits, the time to invest in an electric vehicle is now.

One of the greatest advantages of purchasing an electric vehicle comes from the federal EV incentive. This incentive is a tax credit worth up to $7,500—taxpayers can redeem it when purchasing qualified vehicles in 2023. This tax credit is deducted directly from your tax liability, substantially reducing or even eliminating what you owe.

As mentioned earlier, the tax credit is only up to $7,500. Currently, it ranges from $2,500 to $7,500, and there are unique stipulations that could make you ineligible. Generally speaking, there are three factors that affect the EV credit:

$2,500 minimum for every vehicle with a battery pack ≥ to 5 kWh
$417 for every battery pack on the vehicle
$417 per kWh exceeding 5 kWh

Let’s look at a few sample cars and do some calculations for what their tax credit should be. Keep in mind that while a calculation can exceed $7,500, that is the cap for the credit.

Overall, the formula should be as follows:

Tax Credit = ($2,500) + ($417 x (total kWh – 5 kWh) + ($417 x total # of battery packs)

But this formula makes no sense in a vacuum. Let’s apply it to some actual examples:

Sample CarBattery Size# of BatteriesFormula
Toyota Prius Prime8.8 kWh1($2,500) + ($417 x (8.8 – 5) + ($417 x 1)
$2,500 + ($417 x 3.8) + $417
$2,500 + $1584.6 + $417 = $4,501.6
Mitsubishi Outlander PHEV12.0 kWh1($2,500) + ($417 x (12.0 – 5) + ($417 x 1)
$2,500 + ($417 x 7) + $417
$2,500 + $2,919 + $417 = $5,836
Tesla Model 3 Long Range78.3 kWh1($2,500) + ($417 x (78.3 – 5) + ($417 x 1)
$2,500 + ($417 x 73.3) + $417
$2,500 + $30,566.1 + $417 = $33,483.1 / $7,500

Looking at the Tesla Model 3, you can probably understand why they capped the maximum tax credit at $7,500. While saving $33,000 on taxes would be nice, it would be impractical for the government to offer such a massive tax incentive.

Interested in seeing the calculations for all qualified vehicles? Check out this list.

How the EV Tax Credit Is Changing in 2023

The EV tax credit is changing substantially in 2023. There was a stipulation in 2023 that any manufacturer that’s sold over 200,000 electric vehicles is no longer eligible for the credit. This means that EVs purchased from Tesla, GM, or Toyota in the latter half of 2022 couldn’t be used for the credit. This stipulation is going away in 2023, meaning that there’s no limit on the quantity sold.

Furthermore, all vehicles with a battery pack of at least 7.0 kWh are going to be eligible for the full $7,500 stipend beginning in 2023. Additionally, vehicles purchased from dealers are eligible when they were not in the past. However, these dealership vehicles get a credit of 30%, up to a $4,000 maximum.

However, there will be numerous additions made to the EV tax credit as a result of the Inflation Reduction Act passing. New qualifications include:

  • A price cap on qualifying vehicles. $55,000 for cars and $80,000 for trucks, SUVs, and crossovers.
  • Half of the credit is contingent on 40% of the materials in the battery being extracted or processed in the U.S. or in countries where we have a free-trade agreement.
  • The other half of the credit is contingent on 50% of the value of the battery components being manufactured or assembled in North America.

These requirements are going to be gradually intensifying over the years. Overall, the primary intention of these changes is to spur EV production in the American economy.

Finally, there’s an additional qualifier starting in 2023. If you pass a certain income level, you’re no longer eligible to claim the credit. For joint filers, this income ceiling is $300,000. For a head of household, it’s $225,000. Finally, for single and separate filers, it’s $150,000. Want to stay on top of developments to the EV tax credit? Use this government resource to track any changes.

A final change moving into 2023 is that the new EV tax credit is not retroactive. This means that vehicles purchased in 2022 will not qualify for the EV tax credit in 2023.

How to Claim the EV Tax Credit

Now that you understand the stipulations around it, let’s break down the process of how to claim the EV tax credit.

Purchase a Qualified Vehicle

The first step is purchasing a vehicle that qualifies and meets all of the prerequisites mentioned above. As mentioned earlier, if you’re not sure what vehicles qualify, consult this list.

There are some additional requirements for what vehicles qualify that we didn’t review above. The vehicle must have four wheels, cannot weigh over 14,000 pounds, and must be charged from an external power source with a plug.

Acquire a Letter of Certification

After purchasing a qualified vehicle, it’s crucial that you acquire a letter of certification from your dealer. This letter of certification is required as evidence of your EV purchase by the IRS when you claim the credit on your personal tax return. A letter of certification should specify vehicle details like its make, model, the tax year it qualifies for, and the total amount of EV tax credit it should receive. This letter of certification proves to the IRS that you purchased a qualifying vehicle and are eligible for the tax credit.

Complete IRS Form 8936

Once you’ve purchased an eligible vehicle and obtained your letter of certification, you must complete IRS form 8936. This is an EV federal tax credit form that’s specifically dedicated to claiming this specific tax. You will need to have this form completed and submit it to the IRS when you file your taxes. Make sure that you don’t miss tax deadlines!

Need Help Filing Taxes?

Making a simple mistake on the EV federal tax credit form can make you miss out on thousands in potential savings. Whether you find taxes to be a headache or just want to make sure they get done right, a professional financial partner may be the answer for you.

Search for State Rebates and Credits

There’s more you can do to minimize your tax liability in addition to claiming the EV tax credit. While we’ve focused on the federal credit in this blog, research to see if you qualify for any local state taxes as well. States that offer their own EV tax rebate include:

  • Colorado: $5,000
  • Connecticut: $5,000
  • Delaware: $3,500
  • Maryland: $3,000
  • California: $2,500
  • Massachusetts: $2,500
  • Oregon: $2,500
  • New York: $2,000

Depending on your state, hybrid vehicles, home charging equipment, fuel cells, and more may be applicable for rebates. Staying informed is key to excellent money management, so make sure that you’re tracking all changes to local EV tax policies.

Stay On Top of Changes With Summit

Tax policies are constantly changing. If you feel like you don’t have the time or energy to keep up, work with Summit Wealth Partners. We’ve been helping individuals maximize their wealth for over 40 years and can do the same for you. Contact us today and get started on locking down your financial future.