If you’re in the market for a plug-in electric vehicle, you’re probably familiar with the benefits and drawbacks of this type of vehicle versus one powered by fossil fuel (see an earlier blog that details the factors to keep in mind). Some of the rules related to federal tax credits are different in 2024 as compared with 2023.
Overview of federal tax credits
There are 3 potential credits: the new clean vehicle credit, the previously-owned clean vehicle credit, and the commercial clean vehicle credit. Each of these credits has its own rules for eligibility. And there are different dollar limits on the credit amount.
The commercial clean vehicle credit is for a vehicle with a character of which is subject to an allowance for depreciation (i.e., is used in business); it’s subject to the general business credit. The new and previously-owned clean vehicle credits are designed primarily for consumers, but if used for business driving, that portion of the credit is subject to the general business credit.
Changes for 2024
For vehicles placed in service on or after January 1, 2024, there are a number of changes and other noteworthy rules. Some apply only to the new or previously-owned clean vehicle credits, while others only the commercial clean vehicle credit. For the new or previously-owned clean vehicle credits:
- New battery component rules. In 2024, to be eligible for the $3,750 critical mineral component of the credit, the percentage of the value of the minerals extracted or processed in the U.S. or a free-trade agreement partner or recycled in North America must be at least 50% (it was 40% in 2023). To be eligible for the $3,750 battery components portion of the tax credit, the percentage of the value of the battery’s components that are manufactured or assembled in North America must meet or exceed, the percentage must be 60% (it was 50% in 2023). As a result of these new percentages, there are only 19 models that qualify for a full credit of $7,500 or a partial credit of $3,750 for a new EV, down from 43 in 2023.
- Qualified manufacturer. Vehicles must be made by a qualified manufacturer (one that has a written agreement with the IRS to provide reports on VIN numbers). The IRS maintains a list of qualified manufacturers.
- MSRP limitations. These depend on the type of vehicle. The label attached to the vehicle at the dealer displays this information. The actual price paid, which may reflect dealer incentives, is not controlling.
- Income limits apply for the new and previously-owned clean vehicle credits. These are not indexed for inflation, so the same limits for 2023 apply for 2024. If a partnership or an S corporation places a new clean vehicle in service and the new clean vehicle credit is claimed by individuals who are direct or indirect partners of that partnership or shareholders of that S corporation, the modified AGI thresholds apply to those partners or shareholders. There are no income limits for the commercial clean vehicle credit.
- You must report the vehicle identification number (VIN) of the vehicle on your income tax return (whether or not you sell the credit to the dealer, as explained below).
- Sellers must provide reports to you and the IRS regarding the sale of the vehicle
- You may elect to transfer the new clean vehicle credit to the registered dealer (explained next).
For the commercial clean vehicle credit:
- Incremental cost. The credit is limited to the lesser of (1) 15% of the taxpayer’s tax basis in the vehicle (30% in the case of a vehicle not powered by a gasoline or diesel internal combustion engine), or (2) the incremental cost of the vehicle. The incremental cost is the excess of the purchase price over a comparable vehicle powered by fossil or diesel fuel. The IRS said that the incremental cost of all street electric vehicles (other than in the case of compact car PHEVs) that have a gross vehicle weight rating of less than 14,000 pounds will be greater than $7,500 in calendar year 2024 (i.e., the credit for street EVs less than 14,000 pounds isn’t limited by the incremental cost in 2024). For heavier vehicles, the incremental cost is what the Department of Energy says it is, but it hasn’t yet said what this is.
Selling the tax credit to the dealer
For purchases qualifying for the new or previously-owned clean vehicle credit (but not the commercial clean vehicle credit), the credit amount can be “sold” to the dealer when making the purchase. This can be done in cash or as help with the purchase (e.g., applied toward a down payment).
Buyer’s rules. To transfer a credit, the buyer must be under the income limit for credit eligibility and tell the dealer this is so. If it turns out that income is higher than the limit, the credit must be repaid when the return for the year is filed. This is similar to the premium tax credit recapture for an advance credit used to obtain personal health coverage on a government marketplace.
The credit is non-refundable, so if a transfer is made and you don’t have sufficient tax liability to have claimed it on a return, the excess is not subject to recapture from the dealer or you.
Dealer’s rules. The dealer must be registered with the IRS for this purpose. The dealer must provide a statement to the buyer (signed under penalty of perjury) that contains the following information:
- Seller/Dealer name and taxpayer ID number
- Buyer’s name and taxpayer ID number
- Maximum credit allowable for new vehicles or for previously owned vehicles
- Vehicle identification number (VIN), unless the vehicle is not assigned one
- Battery capacity
- Date of sale
- Sale price
- For new vehicles, verification that the buyer is the original user
Some people I know who bought EVs in 2023 love them. Whether your next vehicle is a plug-in EV because of climate change concerns or because you simply like the model, keep tax breaks in mind when making a selection. The tax breaks may not be a deal breaker, but could tip the scales in favor of one model over another. Also check for state-level credits or other tax breaks through DSIRE or do a search through the U.S. Department of Energy.