Tax Credits for Hybrid Cars and Electric Vehicles: An Intro Guide

If you’re thinking about buying a new car, you should be aware of the list of vehicles that are eligible to increase your tax refund. Federal tax credits for hybrid cars and electric vehicles include specific EV vehicles that are qualified for a tax credit of up to $7,500. 

The initial cost of some of these vehicles might be what’s holding you back, but tax credits can make a big dent in the price of an electric or plug-in hybrid car. The goal is to encourage consumers to buy an electric vehicle not just for the electric car rebate but as an initiative to promote a cleaner environment and reduce reliance on vehicles powered by internal combustion engines fueled by diesel or gasoline.

Keep reading to learn more about tax credits for hybrid cars.

Are there tax credits for hybrid cars and electric vehicles?

In 2022, the Inflation Reduction Act included new tax provisions, expansions, and extensions of tax benefits related to healthcare and energy efficiency. Since then, the tax credit for hybrid cars and electric vehicles, known as the clean vehicle credit, has been expanded and modified.

Tax credits for electric vehicles and plug-in hybrid cars can be dollar-for-dollar reductions on the taxes you owe for the year, up to $7,500, as well as save money on gasoline for hybrid cars.

There are four different types of electric vehicle incentives for EVs and hybrid cars:

• New Plug-in and Fuel Cell Electric Vehicles Purchased in or after 2023: Receive a tax credit of up to $7,500 for new vehicles purchased in or after 2023.
• Pre-owned Plug-in and Fuel Cell Electric Vehicles Purchased in or after 2023: Receive a tax credit of 30% of the purchase price, up to $4,000, for a qualified used vehicle purchased for $25,000 or less from a qualified dealer. Other requirements apply.
• New Plus-in and Fuel Cell Electric Vehicles Purchased Before 2023: Receive a tax credit of up to $7,500 for new vehicles purchased before 2023. The amount of credit varies based on the manufacturer phase-out and battery capacity.
• Electric Vehicle Recharging Property Placed in Service in or after 2023: Your home, business, or facility may be an eligible location for tax credits that could save you up to 30% off the cost of installing EV charging infrastructures. 

Note that these are all tax credits, not deductions. Learn more about the difference between tax credits vs. deductions to ensure you understand how both impact your taxes.

How much is the federal tax credit for new electric vehicles?

Plug-in hybrid, all-electric, and fuel-cell electric vehicles purchased new in or after 2023 may be eligible for a federal income tax credit of up to $7,500.

The amount and availability of the credit will depend on several factors. Including:

• The vehicle’s final assembly location
• MSPR, battery component
• Critical mineral sourcing
• Your modified adjusted gross income

What are the requirements for the federal tax credit?

There are five requirements you must meet in order to qualify for the electric vehicle tax credit:

Taxpayer requirements

To qualify, a taxpayer must buy it for their own use, not for resale, and use it primarily in the U.S. Additionally, the taxpayer’s modified adjusted gross income (MAGI) cannot exceed:

• $300,000 for married couples filing jointly
• $225,000 for heads of households
• $150,000 for all other filers

You can use your modified AGI from the year you took ownership of the vehicle or the year before, whichever is less. Your modified AGI must be below the threshold in one of the two years in order to claim the credit.

Your modified AGI is the amount on your Form 1040, line 11, plus:

• Foreign Earned Income: Any amount on line 45 or line 50 of Form 2555
• Any amount excluded from gross income because it was received from in American Samoa or Puerto Rico.

The credit is nonrefundable and cannot be carried forward. Therefore, taxpayers should ensure they have a tax liability to take advantage of the credit.

Qualified vehicles

In order to qualify for the EV tax credit, a vehicle must meet the three below requirements:

• Have a gross vehicle weight rating of less than 14,000 pounds.
• Have a battery capacity of at least 7 kilowatt hours.
• Be made by a qualified manufacturer, with the exception being that fuel cell vehicles do not need to be made by a qualified manufacturer to be eligible.

The sale only qualifies if:

• You buy the vehicle new. “New” meaning the vehicle hasn’t been previously purchased, registered, titled, or used for any purposes.
• At the time of the sale, the seller reports the required information to you and the IRS. Sellers are required to report your name and taxpayer identification number to the IRS in order for you to be eligible to claim the credit.

For vehicles placed in service on or after January 1, 2024, the dealer must be registered with IRS Energy Credits Online, and the vehicle must be approved through Energy Credits Online at the time of sale.

Final assembly

Vehicles and cars that qualify for EV tax credit must undergo final assembly in North America to qualify. 

To check if your vehicle meets the requirements for final assembly location, you can look at your vehicle’s window sticker, where you find your vehicle’s weight, battery capacity, VIN, and final assembly location, listed as “final assembly point.”

You may also go online to the Department of Energy’s page on Electric Vehicles with Final Assembly in North America and use the VIN Decoder tool under “Specific Assembly Location Based on VIN” to see if your specific vehicle meets the requirements for final assembly location.

Critical minerals and battery components

The credit amount for vehicles placed in service, delivered to the consumer on or after April 18, 2023, will depend on the vehicle meeting the critical minerals and battery sourcing requirements. 

A vehicle that meets both requirements can be eligible for the full $7,500 credit, while a vehicle meeting only one of these requirements may only be eligible for a credit of $3,750. 

A vehicle meeting neither requirement is not eligible for the credit. In some situations, you may need to check with your dealer regarding the eligibility of and potential credit amount for a specific vehicle. 

MSRP

A vehicle’s manufacturer-suggested retail price (MSRP) is 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.

This does not include the cost of optional items added by the dealer, taxes and fees, or destination charges. In addition, manufacturer/dealer incentives and trade-ins do not affect MSRP.

A vehicle’s MSRP can’t exceed:

• $80,000 for vans, sport utility vehicles and pickup trucks
• $55,000 for other vehicles

How to claim the federal tax credit for hybrid cars and electric vehicles

Starting January 1, 2024, in order to claim tax credits for electric vehicles and hybrid cars, the credit eligibility and the amount will be determined at the time of the sale using the IRS Energy Credits Online website.

The dealer is required to complete and submit the time-of-sale report online, and it will be accepted or rejected in real time. Then, the dealer is required to provide you with a copy of the time-of-sale report that you will need in order to claim the credit. They can either claim the credit on their own tax return on Form 8936 or they can transfer the credit to the dealer and have it applied to their final purchase cost.  See the link above under the section claiming the credit for more details.

If your vehicle qualifies for a credit, you can claim the credit on your tax return using Form 8936 for the year in which it was placed in service. Or, you can transfer the credit to the dealer so they can apply the credit amount to your final purchase cost, essentially allowing you to receive the benefit of the credit at the time of the sale. 

You must still fill out Form 8936, reporting your eligibility for the credit and the decision to transfer the credit to the dealer.

Are there state hybrid car tax credits as well?

In addition to the Federal Inflation Reduction Act of 2022, you may have opportunities to claim additional incentives to drive down the cost of clean vehicle ownership through local or state programs, discounts, and tax incentives.

For example, California’s Clean Vehicle Rebate Program (CVRP) is one of the best financial incentives for buying an electric vehicle in California. The aim of their rebate for electric vehicles is to encourage you to choose a greener vehicle by reducing the initial cost of purchasing one.

Check out your local or state programs and make sure you review all the information available to see if you qualify for other less-known credits and deductions, as well as price incentives.

Don’t worry about knowing about these credits and deductions. No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.