IRS Finalizes 2024 Federal EV Tax Credit Rules: Key Updates on Eligibility

The IRS has finalized its 2024 regulations for the federal tax credit program for electric vehicles, offering up to $7,500 in potential savings. Key updates include relaxed requirements for battery material sourcing, effective until 2027.

Understanding Eligibility and Benefits of the 2024 Federal EV Tax Credit

Many new and prospective customers have inquiries regarding the eligibility for a federal tax credit on electric vehicles as sales of these vehicles continue to increase in 2024. A vehicle's eligibility is a straightforward yes or no inquiry; however, the amount that may be awarded to each household is contingent upon various factors. Fortunately, all the necessary information regarding tax credits for new or existing electric vehicles has been consolidated into a single location.

According to the IRS (via Electrek), the potential financial benefits of the federal tax credit for electric vehicles are significant. If you acquire a new, qualified plug-in electric vehicle (EV) or fuel cell electric vehicle (FCV), you could be eligible for a credit of up to $7,500 under Internal Revenue Code Section 30D. The Inflation Reduction Act of 2022 has modified the parameters of this credit for vehicles purchased between 2023 and 2032. Still, it has also extended the credit, offering you an excellent opportunity to save on your taxes.

However, it is not feasible to anticipate that Uncle Sam will reduce one's taxes by $7,500 in April simply by purchasing an electric vehicle. In reality, the eligible amount is determined by one's income tax and various parameters regarding the acquired electric vehicle, such as its manufacturing location.

It is imperative to gain a comprehensive understanding of the current operation of the Federal EV tax credit.

Understanding the “may” and “up to” in the $7,500 credit is critical to grasp the potential benefits fully. The government uses these terms to indicate that the credit is not a guaranteed flat rate but a possible maximum. In other words, you may be eligible for a federal tax credit of up to $7,500 for an electric vehicle. This credit may initially seem like a straightforward flat rate, but it's essential to understand that it's not a guaranteed amount.

For example, the federal tax credit received would be $3,500 if a Tesla Model 3 was purchased and income tax was owed for the year. The full $7,500 credit would be available if $10,000 in federal income tax were owed.

Notably, any unused portion of the $7,500 is not eligible for a refund or credit toward next year's taxes.

Key Terms of the 2023 Federal EV Tax Credit: Eligibility and Benefits Explain

The Biden Administration implemented the subsequent terms during the summer of 2022, which became effective on January 1, 2023:

Federal Tax Credit For EVs Will Remain At $7,500:

• Tax credit cap for automakers after they hit 200,000 EVs sold is eliminated, making GM, Tesla, and Toyota once again eligible

• The language in the bill indicates that the tax credit could be implemented at the point of sale instead of on taxes at the end of the fiscal year

• In order to get the full tax credit, the EV must be assembled in North America and…

• Qualifying EVs must also have a battery size of at least 7 kWh and a gross vehicle weight rating of less than 14,000 pounds

• A new federal tax credit of $4,000 for used EVs priced below $25k

• Revised credit applies to battery electric vehicles with an MSRP below $55,000

• Also includes zero-emission vans, SUVs, and trucks with MSRPs up to $80,000

• New credit also expands to commercial fleet customers

• The federal EV tax credit will be available to individuals reporting adjusted gross incomes of $150,000 or less, $225,000 for heads of households, or $300,000 for joint filers

• The new credit will also continue to apply to Plug-in Hybrid EVs (PHEVs) as long as they meet the same requirements outlined above

Revamped Used Electric Vehicle Tax Credit

Additionally, the provisions for used electric vehicles (EVs) have been revised to provide a credit of 30% of the sale price, up to a maximum of $4,000. This should assist consumers such as yourself in regaining some of the money they spent at the end of the fiscal year as long as you adhere to the provisions specified by the IRS.

To qualify as a customer, you must:

• Be an individual who bought the vehicle for use and not for resale

• Not be the original owner

• Not be claimed as a dependent on another person’s tax return

• Not have claimed another used clean vehicle credit in the three years before the EV purchase date

• Modified adjusted gross income must not exceed $75k for individuals, $112,500 for heads of households, and $150k for joint returns

For the used EV to qualify for federal tax credits, it must:

• Have a sale price of $25,000 or less

• Have a model year at least two years earlier than the calendar year when you buy it

• Not have already been transferred after August 16, 2022, to a qualified buyer

• Have a gross vehicle weight rating of less than 14,000 pounds

• Be an eligible FCV or plug-in EV with a battery capacity of at least 7 kilowatt hours (kWh)

• Be for use primarily in the United States

• You buy the vehicle from a dealer

• Purchaser must be an individual (no businesses) to qualify for used credit

• A used vehicle qualifies for tax credit only once in its lifetime

IRS Eases 2024 EV Tax Credit Rules, Relaxing Sourcing Requirements Until 2027

The IRS released its final federal tax credit program regulations in May 2024. The initial regulations mandated that qualified vehicles be assembled in North America and that a progressively more significant proportion of battery materials and components be manufactured on the continent and in countries with free trade agreements with the United States.

After a period of challenges for automakers striving to meet the stringent regulations, the US Treasury Department and IRS have made a significant change. They have relaxed some of the parameters, including sourcing graphite, electrolyte salts, binders, and additives. This relaxation, which will be in effect until 2027, is a welcome relief for the industry.

This latest information follows an update from October 2023 that addressed the transfer of credits. According to the Internal Revenue Service:

"The Internal Revenue Service issued proposed regulations, Revenue Procedure 2023-33 (PDF), and frequently asked questions today for the transfer of new and previously owned clean vehicle credits from the taxpayer to an eligible entity for vehicles placed in service after Dec. 31, 2023."

This new 'transfer' provision offers a flexible solution. It allows a new EV purchaser to transfer the tax credit to the dealer who sold them their new EV. The vendor may provide the equivalent as a partial payment, down payment, or cash, giving the purchaser more control over their tax credits.

Nevertheless, the same eligibility criteria remain in effect, including the buyer's federal tax burden. The client is required to provide the dealer with all of their tax information, which will subsequently be submitted to the IRS. The client is responsible for disclosing the information, as the dealer is not obligated to verify it. All previous vehicle requirements, such as the MSRP limits and the income limit requirements for purchasers, remain applicable.

This update permits circumvention of the sole requirement: the buyer's tax burden. The IRS has stated that it will not "recapture" the difference if, for some reason, a new car is purchased, but the tax burden is less than the entire amount of the tax credit for which the buyer is eligible.

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