Tax Credits for Electric or Hybrid Vehicles in 2023/2024 - SIMPLIFIED

With the price of new and used vehicles in crazy town, tax credits for car purchases can have a big impact on what car you decide upon.

If you buy an electric or hybrid car, do you get the tax credit?  Both the VEHICLE and the TAXPAYER must qualify now to get the tax credit.

1. Does the NEW vehicle qualify?

2. Buying used? Does the USED vehicle qualify?

3. Do YOU qualify?

4. How to claim the credit and get my money!

What's NEW in 2023 and coming in 2024?

You have likely heard the buzz, the hybrid and electric vehicle credits are here to stay...until 2025... until we have a Presidential Election... or when some rule gets buried in a new bill in Congress...and so they continue to complicate the tax code.

NEW rules to electric vehicle tax credits are here in 2023, some good and some bad. 

In 2022, we had to sadly break the news to our clients that their Tesla purchase didn't qualify.

In 2023, Tesla's are back on the list!

Manufacturer caps are gone, but now where the car is assembled, where the battery components are sourced, the purchase price and ALSO NOW your income level matters... oh and now used cars can qualify too.

Both the VEHICLE and the TAXPAYER must qualify now to get the tax credit.

If you and the vehicle qualify, your 2023 or 2024 electric vehicle tax credit could be as high as $7,500 for new vehicles and as high as $4,000 for used vehicles. 

Note your vehicle may partially qualify. If this is the case, you may get a part of the credit. Best bet - follow the steps below to look it up and see HOW MUCH the credit is for that vehicle on the lookup tool.

In 2024, a new headache is coming for tax preparers but a great option for consumers.  You can TRANSFER the credit to the dealer at purchase and get a price reduction for the credit amount at the date of purchase.

Plan to see dealers wheeling and dealing in 2024 by offering a reduced price on new purchases.

The catch - if you don't qualify because of your income level and the dealer takes the credit, YOU PAY IT BACK TO THE IRS when you file your tax return. 

Update: The Treasury provided new guidance in October of 2023, regarding 2024 dealer credit transfers. When the tax credit is transferred to the dealer at purchase, it becomes a refundable tax credit. What does that mean? If you don't have a tax liability or $7,500 in tax liability, you can still get the full credit at purchase.  This allows lower-income taxpayers, students, and retirees with little to no tax liability to still get the full credit.

Let's focus now on how to see if your purchase qualifies for a tax credit.

Step 1: Does the NEW vehicle qualify?

With price caps, battery and assembly requirements, you can dive into the details on the IRS website OR you can simplify your life and use the online LOOKUP tool that tells you which vehicles qualify and what the credit is for that vehicle.

Once again, here's that website: https://fueleconomy.gov/feg/tax2023.shtml

Step 2: Buying used? Does the USED vehicle qualify?

New to 2023, used vehicles can qualify for a credit. If you also qualify, you can claim a credit of up to $4,000, limited to 30% of the car’s purchase price.

Some other qualifications:

• The used car must be plug-in electric or fuel cell with at least 7 kilowatt hours of battery capacity
• Only qualifies for the first transfer of a vehicle
• Purchase price of car must be $25,000 or less
• Car model must be at least two years old
• Vehicle must weigh less than 14,000 pounds
• Credit can only be claimed once every three years

Feeling a bit dizzy? Again, simplify your research by using the Used Vehicle Lookup Tool to see if the vehicle qualfiies.

Step 3: Do YOU qualify?

If you are a high earner, this tax credit has been taken away from you.  Your Modified Adjusted Gross Income must not exceed the threshold listed below to qualify.  

Tax tip: If you are CLOSE, consider contributing to an HSA or Pre-tax retirement plan to bring your AGI under the threshold.  You can use the LESSER of the current year MAGI or the prior year MAGI. So if you are buying in 2024 and your MAGI for 2023 was lower than the threshold, you qualify even if your 2024 is not.

New cars

Used cars

Step 4: How to claim the credit and get my money!

Buying in 2024, you transfer the credit to the dealer and you get a price break on the car at the date of purchase. You can also opt not to transfer the credit and claim it yourself when you file your 2024 taxes in 2025. Either way, let your tax preparer know so they can record the credit and transfer on the tax return.

Buying in 2023, provide your vehicle purchase information to your tax preparer when you file your 2023 tax return in 2024. The credit is applied to your tax return. If this triggers a refund, you receive the tax refund from the IRS shortly after filing your tax return.

To claim the credit, use Form 8936 when filing federal income taxes. The credit is nonrefundable in 2023, which means it can lower or eliminate taxes owed but will not result in a refund. You also won't be able to carry over any excess amount to offset future taxes. 

The new guidance from the IRS in 2024 makes the credit transferred to dealers refundable, meaning you get the credit even if you don't have a tax liability to cover it. As this guidance is still new and the IRS website has not been updated, we're still waiting to hear more details on it.

Some fine print: Delivery date matters! You generally can only claim the clean vehicle tax credit for the tax year the vehicle was delivered to you, not necessarily the year it was purchased.

Resources: 

• IRS - Credits for new clean vehicles purchased in 2023 or after 
• FuelEconomy NEW Vehicle Credit LOOKUP TOOL
• FuelEconomy USED Vehicle Credit LOOKUP TOOL
• Form 8936 Qualified Plug-In Electric Drive Motor Vehicle Credit
• IRS - Commercial Vehicle Clean Vehicle Credit
• IRS - 2022 and Before

_{Disclaimer: The information in this article is for informational purposes only and in no way meant to imply or be construed as tax or legal advice.}