Clean vehicles are becoming increasingly popular among Americans and for good reason! But did you know you can qualify for a tax credit if you purchase or lease a “clean” vehicle?

Just last year, the qualifications for the tax credit have changed, so let’s make sure you understand how this credit works, whether you already own a vehicle or are considering purchasing one or leasing one.

The Inflation Reduction Act of 2022 and New Changes in 2024

A couple of years ago, legislation passed the Inflation Reduction Act of 2022. This United States federal incentive, under the Biden administration, hopes that by offering financial benefits to individuals or businesses that make qualifying purchases, it will, in turn, help reduce greenhouse gases, and carbon emissions, and to help combat climate change.

But just this year, in 2024, the financial incentives have changed two ways.

The first change is a huge win! The financial incentive is now available at the point of sale. That means, any qualifying clean vehicle purchased after January 1, 2024, will immediately be eligible for the tax credit at the point of sale at the dealership. Additionally, when purchased at the point of sale, the tax credit is no longer based on personal tax liability.

The lesser good news is that the 2024 change now includes an increase in the battery and mineral component requirements.

Any eligible clean vehicles purchased after January 1, 2024, will no longer qualify if their battery components were manufactured by a “foreign entity of concern.” As of this writing, these countries include North Korea, China, and Iran, but due to the nature of China playing a major role in the manufacturing of batteries and battery components, this will cause a drastic change in the number of qualifying clean vehicles.

Below is a quick reference table to understand how the increase in battery and mineral components changes clean vehicle qualifications for the tax credit over the next ten years.

Which Clean Cars Are Eligible?

A clean vehicle is considered an electric car or a plug-in hybrid, but not every one of these cars will qualify for the federal EV tax credit.

Buyers of eligible new clean vehicles may qualify for a tax credit of up to $7,500, whereas purchasing a used clean vehicle may only be eligible for up to $4,000 or 30% of the car’s sale price—whichever is lower. Additionally, when purchasing a used vehicle, it must be made by a dealer and must be at least two years old.

In addition to meeting the requirements for the battery and mineral component, as mentioned above, there are some more eligibility requirements:

- The final assembly of the vehicle must take place in North America (the United States, Canada, or Mexico).

- The vehicle must have a battery capacity of at least 7 kWh (kilowatt-hours)

- The limit on the MSRP (manufacturer’s suggested retail price) is:

o $55,000 for sedans

o $80,000 for SUVs, trucks, and vans

Clean Tax Credit Income Limit

Finally, to qualify for the new Clean Vehicle Credit, taxpayers must meet certain modified AGI (adjusted gross income) limits.

- $150,000 for single filers

- $225,000 for heads of household

- $300,000 for joint filers/married couples

If your AGI exceeds these limits, you will not qualify for the tax credit.

You can use your AGI from the year the vehicle was purchased or the year before, whichever income is less. If you do not transfer the credit, it is nonrefundable when you file your taxes. Additionally, you cannot apply any excess credit to future tax years.

Katie Hardie, CPA is the owner of Hardie CPA and a member of the American Institute of Certified Public Accountants. She has a full range of experience as a CPA - including tax, bookkeeping & audit. Her experience spans both public and private accounting. Her passion is helping small businesses & individuals with tax & accounting needs. Katie seeks to empower small-business owners in the area of bookkeeping & tax so that they can stay on track, focus on their bottom line and grow their business. She works virtually and can be reached at katie@hardiecpa.com or click here to fill out a contact form.

Hardie CPA provides the information in this article for general guidance only. It is not intended to nor does it constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

The Clean Vehicle Credit Explained