The sticker price may be higher on electric vehicles (often about $10,000 more, according to Kelley Blue Book), but the higher cost can be offset in many cases by a tax credit of up to $7,500. And that doesn’t even take into account the fact that electric cars use cheaper power and require less maintenance than their gas-powered counterparts. The new Inflation Reduction Act signed into law on August 16, 2022 updated and enhanced the rebate, to help spur the push toward cleaner fuels. “The IRA establishes and expands upon several critical tax credits that will help speed up the deployment of EVs and bring down the cost of this technology,” says Britt Carmon, senior advocate for Federal Clean Vehicles & Fuels at the National Resources Defense Council. But with the new law came some new rules around who can take advantage of the credit—and which cars qualify. So before you pull away from the dealership in an EV, here’s how to make sure you reap every financial benefit of going electric.
What is the electric vehicle tax credit?
The tax credit gives you a significant amount of cash back on your next tax return if you buy a qualifying electric vehicle or plug-in hybrid. Before the Inflation Reduction Act, the credit was given to purchasers of the first 200,000 EVs from a particular carmaker, with a $7,500 credit for fully electric cars, and smaller credits for plug-in hybrids. Tax credits are fully subtracted from the amount of income tax you owe, so you’ll likely end up with a big windfall come tax time. The new Inflation Reduction Act gives you the same $7,500 tax credit if you buy a battery-operated EV, and a smaller amount (based on the battery size) for a PHEV. And big bonus: Starting in 2024, it added a new tax credit of $4,000 (or 30 percent of the total vehicle cost) if you buy a used electric vehicle, which can help make EVs more affordable for a larger range of buyers.
Do I qualify for the EV tax credit?
If you make less than $150,000 and you file your taxes as a single, or $300,000 for a couple, you’re entitled to take the tax credit for new EVs. When used car credits begin, you will need to have $75,000 or less in adjusted gross income as a single, and $150,000 if you file jointly. These income caps take effect in 2023, so if you’re over the income limit, you may want to head to the dealership right now.
What are the new EV tax credit rules?
Here’s where you start to see some major changes between the old credit and the new. Here’s the breakdown: “Over the long term, it is positive for EV adoption as a whole, especially as automakers adjust and bring their EV and battery manufacturing supply chains to North America and allow their electric vehicles to once again qualify for this credit,” Carmon says. “Over time this will also create good domestic jobs while helping millions of middle-income Americans afford zero-emitting vehicles.” For electric SUVs, vans, and trucks, you can’t pay more than $80,000 and still get the credit, while for electric cars, the limit is $55,000. To be entirely sure that the car you’re buying qualifies, you can run the vehicle identification number through this VIN decoder to make sure you’ll get some credit for your car (besides just the feel-good factor of helping the planet).
What other credits and incentives are available?
Depending on which state you live in, you may be entitled to additional perks for owning an EV. States like California, New Jersey, Colorado, Connecticut, Maryland, and Texas offer a few thousand dollars’ credit on your state tax bill. Some state power companies offer rebates to offset the cost of installing a faster charger for your EV, or even discounted rates on your electric bill. And you may get discounted tolls or access to the HOV lane as additional perks.
Should I buy an EV now?
For people who will not meet the income guidelines next year, the time to buy is now. But if you’re interested in a car like a Chevy Bolt or Tesla that will become eligible for the credit after the year ends, it may make financial sense to hold off until the new year. But even without the tax credit, purchasing an EV now could make financial sense for you. “Making this transition will save them money in the long run,” Carmon says. “The costs of operating an EV are much less than that of a gasoline vehicle, especially as far as ‘fueling’ and maintenance costs are concerned. So there are lots of benefits to transitioning to an EV.”
