The $4,000 Used EV Tax Credit

Now is a great time to consider your first electric vehicle or plug-in hybrid EV! You could get up to $4,000 in tax incentives from the I.R.S. if you buy a qualifying used electric vehicle, and your income qualifies you to receive the credit. But before you run out and grab yourself a sweet ride, there are some things you need to know. This article will give you the facts you need to make sure you maximize your savings.

***Update for 2024: You can now get the $4,000 Used Clean Vehicle at Point of Sale! That means it comes directly off the purchase price at closing – you don’t have to wait until you file your taxes to receive this credit!***

The Basics of the Used EV Tax Credit:

• The Inflation Reduction Act of 2022 provides for a Used Clean Vehicle Tax Credit for 30% of the purchase price of a qualifying clean vehicle, up to $4,000.
• There is a price cap of $25,000 on the vehicle purchased to qualify.
• There are income limits to qualify: $150,000 for married couples filing jointly, $112,500 for head of household, and $75,000 for individual filers.
• The tax credit is not refundable, nor can it be carried forward.
• Any vehicle with a EV battery of at least 7 kilowatt hours qualifies: this includes most plug-in hybrid EVs.
• The vehicle cannot have been awarded the credit previously.
• The vehicle has to be purchased from a licensed auto dealer.
• The dealer and the purchaser must both report the sale to the I.R.S.

Let me be clear: Green Wave is not your tax accountant. We are electric vehicle experts. This article is for informational purposes only, and intended to help you make the right choice as you make a move to a clean vehicle.

Used EV Tax Credit Background

The Inflation Reduction Act of 2022 (IRA), signed into law last August, was incredibly important for electric vehicle purchasers. It updated the $7,500 new electric vehicle tax credit and removed the previous limits that had been placed on auto manufacturers. For example, under the old credit Tesla and General Motors were no longer eligible for the credit because those companies had sold enough electric vehicles. Now they are eligible again. On the other hand, the IRA imposed some price caps, income caps, and implemented some requirements for vehicle final assembly and battery components which are intended to ensure that more EVs are made in the U.S.A. Cool stuff, but kind of complicated.

The IRA also created a Used Clean Vehicle Credit, intended to help people get into an EV or PHEV at a much lower price point than a new vehicle. This is especially exciting because a re-used EV is actually the most environmentally beneficial car choice, as the upfront environmental impact of manufacturing an EV is fully offset by its emissions-free operation once the vehicle has traveled about 19,000 miles (International Energy Agency, 2022). But there are income limits, price limits, and other requirements to receive the credit. We have done the research at Green Wave, and this should help you figure out how you and the vehicle you want qualify.

Used Clean Vehicle Requirements

First, there are a few vehicle requirements, which can also be found on the I.R.S. website. First, it’s important to know the federal definition of “Clean Vehicle”, which means that it has a plug for a power source and at least a 7 kilowatt hour battery (https://afdc.energy.gov/laws/409 ). That means that most plug-in hybrids will qualify as well as fully electric vehicles. Questions about the difference between EV and PHEV? Check out the Green Wave guide to see which is right for you.

The biggest requirement to keep in mind is the sale price cap, which is $25,000. This is going to significantly reduce the amount of vehicles that qualify, but because vehicle depreciate according to age and miles, more and more are becoming available every day. Here are some examples of vehicles that may fit into that price category, based on market conditions at the beginning of 2024:

Please keep in mind that these are general vehicle recommendations in this price range, and mileage will impact the price significantly. Green Wave will be stocking most or all of these this spring, so if you’re not sure which is right for you, set up an appointment with us to test drive one!

A couple other key requirements also apply to the vehicle. It must be at least 2 model years old (so the newest vehicles that qualify in tax year 2023 are 2021 model year vehicles). And it can’t have transferred ownership already after August 2022, so make sure your dealer gets you a Vehicle History Report, which will show that. The vehicle must also have a gross vehicle weight rating under 14,000 lbs – not a problem unless you are buying an electric bus or dump truck. And you have to register it in the U.S.

Eligibility for the Used EV Tax Credit

Okay, so now you know how to find the right clean vehicle to get this tax credit. Your next step is to answer the question: do I qualify to receive this credit? Because of the income limits, the non-refundability of the credit, and the nature of our tax code, this question can get pretty complex. And as stated, Green Wave is not a tax service. But here is how you can start to figure out how much tax credit you can be entitled to as part of your purchase.

First, let’s talk about “Adjusted Gross Income” or AGI. This is the total amount of income you report as a taxpayer, less deductions. The standard deduction for a married couple filing jointly is $27,700 in 2023; it is $20,800 for those who file as head of household, and $13,850 for individual tax filers. So unless you have more to deduct than the standard deduction, here are the income limits for the Used Clean Vehicle Tax Credit:

• Married filing jointly:
  • AGI Limit: $150,000
  • Standard Deduction: $27,700
  • Maximum income before deductions = $177,700
• Head of Household:
  • AGI Limit: $112,500
  • Standard deduction: $20,800
  • Maximum income before deductions= $133,300
• Individual filers:
  • AGI Limit: $75,000
  • Standard deduction: $13,850
  • Maximum income before deductions=$88,850

Now that we know the income caps, we have to look at the income minimums, because this tax credit is not refundable. In other words, if you pay $0 in federal income taxes, then Uncle Sam will not cut you a check for $4,000 if you purchase a Used Clean Vehicle. So let’s figure out what your minimum income would have to be to pay at least $4,000 in taxes.

The U.S. has a progressive tax code, which means you get taxed at a higher rate for each dollar you earn. Because we’re trying to figure out the lowest amount of money you can earn and still pay enough taxes to get the benefit of the Used Clean Vehicle credit, we will only look at the lowest tax brackets, which are 10% for income up to $11,000 and 12% for income up to $44,725. Let’s start with $40,000 for easy numbers.

Here’s how it works:

• If you make $67,700 as a married household filing jointly, your taxable liability will be:
• $40,000 AGI ($67,700 minus the standard deduction).
• You will pay $1,100 in tax on your first $11,000 in income, and 12% on your next $29,000, or $3,480. That gives you a total estimated tax liability of $4,580.
• That’s pretty close to getting you a $4,000 tax liability, which means you can claim the credit. The actual minimum income to have a $4,000 tax liability before the standard deduction is right around $63,000 for those filing jointly.
• With the same math, the minimum income for heads of household is $55,967 (before standard deduction) and $49,017 for individual filers.

Please keep in mind, this does not include popular tax credits such as the Child Tax Credit, or other more unique tax situations, but these general guidelines tell us that taxpayers in these categories will benefit most from this credit:

• Individual filers with pre-adjusted income between $49,017 and $88,850.
• Head of household filers with pre-adjusted income between $55,967 and $133,300.
• Taxpayers married filing jointly with pre-adjusted income between $63,000 and $177,700.

Used Clean Vehicle Credit Amount

The Used Clean Vehicle Credit is not just a $4,000 lump sum, no matter what you purchase. It is written as a credit for 30% of the cost of the vehicle UP TO $4,000. So in other words, the credit is maxed out as soon as you are purchasing a vehicle of $13,333.33 or more. While there are some vehicles in that price range, you are probably going to be looking at something tiny (like the Chevy Spark), with a lower range (less than 100 miles) that is a little older, and has higher miles. If that is what you’re looking for, Green Wave can help. But most EV buyers today are looking for something with more range, a bit newer, and with more room.

It’s also important to note: the Used Clean Vehicle Tax Credit cannot currently be used at time of purchase to reduce the sale price. You will not get this money until you file your taxes in the year after you purchase this vehicle.

Dealership Requirements

This next piece of the puzzle is huge. The Used Clean Vehicle Tax Credit can only be claimed if you buy a vehicle from a dealer AND the dealer reports the sale to the I.R.S. There are specific reporting requirements for the dealer, including the VIN of the vehicle, the sale price, the taxpayer I.D. number of the dealership and the purchaser (probably your social security number), and the kilowatt hours for the vehicle’s battery. The dealer also needs to verify that the vehicle has not been sold after August 2022, because each used electric vehicle is only eligible to receive this tax credit once. This is why it’s a great idea to purchase your re-used electric vehicle from a dealership that is knowledgeable about this credit and committed to making sure you receive it!

Your Used Electric Vehicle

Less than 1% of vehicles registered in the United States are electric. But 25% of people say they want to buy an electric vehicle for their next car. If you’re one of these people, then you have a lot to consider when making the switch to a clean vehicle, including range, price, size, and features. You need an EV that’s going to match your lifestyle, and hopefully you will buy one that you think is fun. Here at Green Wave, we have a wide selection of fully electric vehicles as well as plug-in hybrid EVs at a great price. Each vehicle comes with a 3rd party verified battery health report, a limited warranty, and Green Wave plants 100 trees in your name when you buy from us. We accept all trades, including internal combustion engine vehicles, and we can help with financing, a charger for your home, extended warranties.

If your next car is going to be an electric vehicle or a plug-in hybrid, set up an appointment with Green Wave to start your journey. We’re here to help you have fun on your way.