Tax Credits for Hybrid, Electric, and Alternative Fuel Vehicles

The Internal Revenue Service (IRS) has been introducing and maintaining tax credits to promote energy efficiency since 2008, when it added Section 30D to the Internal Revenue Code (IRC). The section is a provision for the Qualified Plug-In Electric Drive Vehicle tax credit, now called the Clean Vehicle Credit, first provided for by the Energy Improvement and Extension Act of 2008. The legislation addresses the impact of greenhouse gas emissions on the climate, and was updated in August 2022 to include new provisions and restrictions.

While the expense of purchasing an alternative-fuel vehicle can be high, the positive impact on the environment and the potential tax credit you can receive might make it worth it. Here's what to know before you buy.

The Clean Vehicle Tax Credit

This tax credit can be as much as $7,500. Before 2023, the amount depended on the type of battery and its capacity. Beginning in 2023, the amount of the credit will depend on the source of the critical minerals in the battery and where it was made. Other requirements include:

• The vehicle must be assembled in North America.
• Your income must be below $150,000 ($300,000 for married taxpayers filing jointly).
• The vehicle sales price must be below $55,000 ($80,000 for pickups and SUVs).

 The IRS provides a list of qualifying vehicles and credits on its website, including:

Vehicles purchased before Aug. 16, 2022, are eligible for the tax credit under the rules that applied before that date. Vehicles purchased between Aug. 17, 2022, and Dec. 31, 2022, are eligible under those rules as well, with the exception that they must have final assembly in North America.

'Neighborhood' Vehicle Credit

"Neighborhood" electric vehicles (two- and three-wheelers) don't qualify for this tax credit, but they have a credit of their own under Section 30D(g) of the IRC. The vehicle must have been purchased in 2012 or 2013, and the tax credit is worth 10% of the purchase price, up to a maximum of $2,500.

How the Tax Credit Works

The Clean Vehicle Credit is capped at $7,500 per vehicle. You can get $3,500 of the credit if a required portion of the vehicle's battery is assembled in the U.S. That portion will change by year:

• 2023: 50%
• 2024: 60%
• 2025: 60%
• 2026: 70%
• 2027: 80%
• 2028: 90%
• 2029–2032: 100%

You can get another $3,500 of the credit if a portion of the critical minerals of the battery came from the U.S. or a free-trade partner, or were recycled in North America. That portion will also increase over time:

• 2023: 40%
• 2024: 50%
• 2025: 60%
• 2026: 70%
• 2027–2032: 80%

Cars purchased before Dec. 31, 2022, are eligible for a tax credit of between $2,500 and $7,500 depending on the battery, which must have at least 5 kilowatt hours of capacity. You're eligible for an additional $417 for every kilowatt hour in capacity beyond that. You must have a binding written contract to claim the credit under the old rules.

Credit Phaseouts

Before 2023, this tax credit would phase out based on when the manufacturer's total, cumulative sales of qualifying vehicles reaches 200,000. The phaseout begins two calendar quarters after the manufacturer reaches this benchmark. The phaseout is typically a 50% reduction if you buy the vehicle in the first and second quarters of the phaseout period. It then drops to 25% in the third and fourth quarters.

However, those manufacturing caps are lifted beginning in 2023.

How to Claim the Federal Tax Credit

You can claim the IRC 30D credit—or the IRC 30D(g) credit—for the tax year in which you purchased and began driving the vehicle. For example, you would need to have purchased the vehicle and started driving it in 2022 to claim the tax credit on the 2022 tax return that you file in 2023.

Claiming the tax credit involves completing and filing both Schedule 3 and IRS Form 8936 with your tax return. Form 8936 will calculate your credit, which you can then enter on line 6f of Schedule 3. You would transfer the total from lines 1 through 7 on Schedule 3 to line 20 of your Form 1040 tax return.

Form 8936 includes a section (Part III) for your personal use of the vehicle, and another section (Part II) for business or investment use. You must additionally complete and submit Form 3800, "General Business Credit," if you purchased the vehicle for business or investment use. You can still claim this credit if you're subject to the Alternative Minimum Tax.

State-Level Tax Credits

The majority of states and the District of Colombia also offer incentives for electric or hybrid vehicles, so you might not be limited to the federal tax credit. There are different benefits available in each state, some of which are tax credits. Other incentives may include utility rate reductions, registration fee reductions, and exemptions from emissions testing.

As of 2022, the majority of states offered tax credits or policies for electric or hybrid vehicles. You're limited to the federal tax credit for states that do not.

Frequently Asked Questions (FAQs)