Starting July 1st, 2023, and until June 30th, 2027, you may be eligible for a one-time excise tax credit for up to $3,000. This tax credit is available when purchasing a qualifying zero-emission plug-in or fuel cell electric vehicle. Regardless of whether you own or lease the vehicle, you may be eligible for the one-time credit. The only catch is that this tax credit is subject to available funding. That means, if you’re considering purchasing an electric vehicle (EV), now is the time to think about how this excise tax credit can work for you.
Excise tax in the United States can be an especially confusing and complicated tax process, so here’s some more information about how this tax credit works. Also, we will explore what you need to know to maximize the tax benefits of purchasing an electric vehicle.
What is an Excise Tax?
An excise tax in the United States is an intranational, indirect tax that is imposed on a specific good or activity. Excise taxes are usually paid directly by businesses. However, they are often passed on to the consumer and can be paid by percentage or charged per unit. Excise taxes can be imposed by federal, state, and local governments.
Federal vs. State Electric Vehicle (EV) Tax Credits
Taxpayers in the entire United States are eligible for the federal tax credit. The Inflation Reduction Act (IRA) of 2022, for example, expands federal tax credits available to promote the development and use of renewable energy. Part of the IRA was to extend federal tax credits for EVs for another decade.
State tax credits and rebates can vary from state to state, so there may be some money-saving options that you should take advantage of now. It’s worth doing some research to learn what incentives or exemptions are available in your state and how this varies from tax credits at the federal level.
Hybrid and Electric Vehicle (EV) Categories
Before discussing EV tax credits, let’s outline how hybrid and electric vehicles can be categorized.
- Plug-in electric vehicles (PEV): Powered at least partially by a battery and charged using electricity.
- Battery electric vehicles (BEV): Sometimes called an all-electric vehicle, it runs entirely on an electric motor and rechargeable battery.
- Plug-in hybrid electric vehicles (PHEV): Combining two modes into one vehicle, they have an electric motor and rechargeable battery but can switch to gasoline once the battery is depleted.
- Hybrid electric vehicles (HEV): Use a gasoline engine with an electric motor and battery, but don’t plug in to recharge.
Future Changes for Plug-in Electric Vehicle (EV) and Fuel Cell Electric Vehicle (FCEV) Tax Credit
Effective July 1, 2023, through June 30, 2027, qualified zero-emissions Plug-in EV and FCEV purchasers may apply for an excise tax credit of up to $3,000. The tax credit is first come, first served and is limited to one vehicle per individual and ten vehicles per business entity.
Criteria for Qualifying Zero-Emission Plug-in or FCEV
- The vehicle must be made by a manufacturer primarily on public streets, roads, and highways.
- The vehicle cannot be modified from the manufacturer’s specifications.
- The vehicle must be new and titled for the first time between July 1, 2023, and July 1, 2027.
- The vehicle must be bought for use or lease by the taxpayer and not for resale.
- The vehicle has a battery capacity of at least 5 kilowatt-hours, or if a motorcycle or auto cycle, has a battery capacity of at least 4.0 kilowatt-hours (applies to plug-in electric).
- The vehicle has a base price of purchase not exceeding $50,000.
- $1,000 for a zero-emission 2 -wheeled plug-in electric drive or fuel cell electric motorcycle.
- $2,000 for a 3-wheeled, zero-emission plug-in electric drive or fuel cell electric motorcycle.
- $3,000 for a zero-emission plug-in electric drive or fuel cell electric vehicle.
Inflation Reduction Act of 2022 Impacts Electric Vehicle Tax Credits Already in Place
On August 17, 2022, the IRA of 2022 extended and amended the Qualified Plug-in Electric Drive Motor Vehicle Credit, now known as the Clean Vehicle Credit (CVC), for another decade. With it, a new requirement for final assembly in North America took effect on August 17, 2022. Additional requirements will occur in the new year.
Beginning January 1, 2023, the CVC brings changes to tax credit requirements already in place. Some amendments include removing manufacturer sales caps, expanding the scope of eligible vehicles to include both EVs and FCEVs, and requiring a traction battery with at least seven kilowatt-hours (kWh).
Additionally, the CVC establishes criteria for a vehicle to be considered eligible that involve sourcing requirements for critical mineral extraction, processing, and recycling, as well as battery component manufacturing and assembly.
Vehicles that meet critical mineral requirements are eligible for a $3,750 tax credit, and vehicles that meet battery component requirements are also eligible for a $3,750 tax credit. Vehicles meeting both requirements are eligible for a total tax credit of up to $7,500.
To be eligible for the credits under these provisions:
- EV vans, sport utility vehicles, and pickup trucks cannot have a manufacturer suggested retail price (MSRP) above $80,000
- All other EV vehicles cannot have a MSRP above $55,000
- Tax credit is limited by thresholds for modified adjusted gross income (MAGI)
- $300,000 for joint filers
- $225,000 for head-of-household filers
- $150,000 for single filers
Tax Credit for Electric Vehicles Purchased Before August 17, 2022
Qualifying EVs purchased before August 17, 2022, are eligible for a tax credit on the purchase of a new EV that:
- draws propulsion using a traction battery that has at least four kilowatt-hours (kWh) of capacity and uses an external source of energy to recharge the battery.
- has a gross vehicle weight rating of up to 14,000 pounds.
- meets specified emission standards.
The minimum credit amount is $2,500, and $7,500 is the maximum credit, depending on the vehicle’s traction battery capacity and gross vehicle weight rating.
This credit will begin to phase out for each manufacturer in the second quarter following the calendar quarter in which a manufacturer has sold a minimum of two hundred thousand qualified PEVs for use in the United States.
Tax Credit for Electric Vehicles Purchased Between August 17th and December 31st , 2022
Qualifying EVs purchased and delivered between August 17th and December 31st , 2022, are eligible for the same tax incentive as before. Meaning that the credit is limited to vehicles with final assembly in North America. However, manufacturer sales caps also apply between these dates.
Get the Information You Need from Excise Tax Experts
Excise tax has unique rules, regulations, and compliance procedures. Even though this may seem daunting for the average taxpayer, fortunately TiP Excise is here to help. Our dedicated specialists have extensive experience with fuel excise tax consulting and compliance. Find out how we can assist with all of your excise tax needs in a way that assures this is done properly and completely, maximizing your financial return.