Planning On Claiming the New Electric Vehicle Tax Credit? cover

Planning On Claiming the New Electric Vehicle Tax Credit?

  • Learn the background of the electric vehicle tax credit.
  • Find the qualifications for the credit.
    • Discover information regarding the income limit on the credit.
    • Find information about the vehicle qualifications for the electric vehicle tax credit.
  • Learn about the information required in the seller-provided report.
  • Link to a list of qualifying vehicles.
  • Learn about the transfer of credit to the dealer.

Although the tax credit for purchasing a new electric vehicle can still be as much as $7,500, Congress has added some new stringent qualifications as to which vehicles qualify, and for the first time, Congress has limited who qualifies for the credit by barring the credit to higher income taxpayers.

But first a little background. Prior to this change, a vehicle qualifying for the credit needed only to be a 4-wheel vehicle, with a minimum battery capacity of 5-kilowatt hours and a gross weight of less than 14,000 pounds. There was also a manufacturer limit of 200,000 units, after which the credit phased out over the subsequent four quarters. There were no qualification requirements for the purchaser of the vehicle.

Planning On Claiming the New Electric Vehicle Tax Credit?

New Qualifications for Electric Vehicle Tax Credit

Under the new law, starting in 2023 the vehicle and the buyer must meet far more stringent requirements for a taxpayer to qualify for the clean vehicle tax credit.

Purchaser’s Income Limit

No credit is allowed for any tax year if the lesser of the modified adjusted gross income (MAGI) of the buyer for the:

  • Current tax year, or
  • The preceding tax year exceeds the threshold amount as indicated below. There is no phaseout and just one dollar over the limit means no credit will be allowed. Thus, Congress has essentially eliminated the credit for higher-income taxpayers.
  • Married Filing Joint or Surviving Spouse – $300,000
  • Head of Household – $225,000
  • Others – $150,000

MAGI is the buyer’s adjusted gross income increased by any foreign earned income and housing exclusions and excluded income from Guam, American Samoa, the Northern Mariana Islands, and Puerto Rico.

Vehicle Qualifications for the Electric Vehicle Tax Credit

To qualify, the vehicle must:

1. Be a 4-wheel vehicle

2. Be a Street Vehicle

The street vehicle must be manufactured primarily for use on public streets, roads, and highways.

3. Have a Minimum Battery Capacity of 7 kilowatt-hours

4. Be acquired for Original Use by the taxpayer

Original use means that the vehicle has never been used by any taxpayer for any purpose. A vehicle is not a new clean vehicle if another person has ever purchased or leased the clean vehicle and placed it in service for any purpose. Where a vehicle is acquired for lease to another person, the lessor is the original user.

5. Have had its Final Assembly in North America

This includes the 50 states, the District of Columbia, and Puerto Rico, Canada, and Mexico. You can determine the manufacturing location by the 17-digit vehicle identification number (VIN). The VIN Decoder website for the National Highway Traffic Safety Administration (NHTSA) also provides final assembly location information. The website, including instructions, can be found at VIN Decoder.

You can find the VIN permanently attached to a vehicle in several locations, appearing on the dashboard for most passenger vehicles and on the label located on the driver’s door frame. You can also find the VIN located on the window sticker of new vehicles, and it often appears on the vehicle listing on dealers’ websites.

6. Meet the MSRP requirement

The manufacturer's suggested retail price (MSRP) cannot exceed:

  • $80,000 for vans, SUVs, and pickups
  • $55,000 for other vehicles

You can find the MSRP on the vehicle information label attached to each vehicle on a dealer’s premises. The MSRP for this purpose equals the base retail price suggested by the manufacturer, plus the retail price suggested by the manufacturer for each accessory or item of optional equipment physically attached to the vehicle at the time of delivery to the dealer. It does not include destination charges or optional items added by the dealer, or taxes and fees.

Even when one purchases a vehicle for less than the MSRP, they base the credit limit on the price of the vehicle on the manufacturer's suggested retail price (MSRP), not the actual price paid for the vehicle.

7. Meet the Critical Mineral and Battery Components test

Congress, in an effort to bring battery manufacturing for electric vehicles to the United States, included a requirement that a percentage of critical minerals needed to manufacture batteries be extracted or processed in the U.S. or a country with a free trade agreement with the U.S. or recycled in the U.S. It also requires a percentage of battery components be manufactured or assembled in North America. The initial percentage is 50% and 100% after 2028.

Luckily for a buyer, the dealer must provide a report that certifies the vehicle meets these requirements by specifying the amount of credit the vehicle qualifies for.

Seller Provided Report

The seller of the vehicle must furnish a report to the buyer and the IRS that includes:

  • The name and taxpayer identification number of the buyer;
  • The vehicle identification number (VIN) of the vehicle (required on the tax return to claim the credit), unless, by U.S. Department of Transportation rules, the vehicle is not assigned a VIN;
  • The battery capacity of the vehicle;
  • Verification that the original use of the vehicle commences with the taxpayer; and
  • The maximum Clean Vehicle Credit is allowable to the buyer with respect to the vehicle.

List of Qualifying Vehicles

The IRS provides a list of eligible vehicles on its website.

Transfer of Electric Vehicle Tax Credit to the Dealer

After 2023, the taxpayer purchasing the vehicle, on or before the purchase date, can elect to transfer the clean vehicle credit to the dealer from whom they purchased the vehicle in return for a reduction in purchase price equal to the credit amount.

A buyer who has elected to transfer the credit for a new clean vehicle to the dealer and has received a payment from the dealer in return, but whose MAGI exceeds the applicable limit, must recapture the amount of the payment on their tax return for the year the vehicle was placed in service.

Have questions about these new rules on the clean vehicle credit? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

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