The Tax Benefits of Buying an Electric Vehicle

There are a number of good reasons to consider buying an electric vehicle (EV): Helping curb climate change and saving money on gasoline purchases are often mentioned. But the most compelling argument for new car shoppers may be the chance to save up to $7,500 on your tax bill.

What are Electric Vehicle Tax Breaks?

The EV tax breaks were included in the Inflation Reduction Act that Congress passed in 2022, providing extensive tax credits and incentives to encourage the development of renewable energy. The $7,500 credit covers not just EVs but also plug-in hybrids, which use battery power and another fuel like gasoline, and fuel cell vehicles, which are powered by hydrogen.

In addition to the federal tax credit, several states also offer financial incentives when purchasing an EV. Illinois, for example, has rolled out an Electric Vehicle Rebate Program in which Illinois residents who buy a new or used EV could be eligible for a $4,000 rebate.

With the tax breaks, governments hope to make the price of a new EV more competitive with gasoline-powered vehicles. One of the main hurdles to buying an EV in the past has been the high purchase price, which tended to be higher than other cars. Thanks to rising competition, there are now an increasing number of EVs priced around $50,000 and even a few economy models below $30,000.

To figure out how much an EV will cost, prospective buyers can use an online auto loan calculator, such as the First Third Car Affordability Calculator, before shopping. It will tell you how much your monthly payment will be when you enter a purchase price. In addition to the purchase price, EV buyers should also consider potential savings on fuel when making a side-by-side comparison with gasoline-powered cars.

While electric vehicle prices have been falling, inflation has driven up the cost of gasoline. With gas prices currently around $3.50 a gallon nationally, driving an average of 1,080 miles per month will cost around $126. Given the same monthly average travel of 1,080 miles, an average EV should cost around $60 in monthly electricity charging costs—or less than half the fuel costs of a gasoline-powered car. Over a year, an EV will save $700 or more in fuel costs.

How the Tax Break Works

For car buyers to qualify for the EV tax break, there are a number of specific requirements issued by the Internal Revenue Service about the purchased vehicles and the purchaser’s income. They include:

• Price Limitation: The EV’s Manufactured Suggested Resale Price (MSRP)—the sticker price—has an upper limit of $80,000 for vans, sport utility vehicles, and pickups and $55,000 for other cars. The MSRP is a published number available from the dealer and many websites, such as fueleconomy.gov/feg/tax2023.shtml. The actual price a buyer pays will likely be less than the published MSRP. 
• Types of EVs: The car must have a battery capacity of at least 7 kilowatt-hours and a gross vehicle weight rating of fewer than 14,000 pounds. Importantly, the final assembly of the EV must have taken place in North America with a substantial proportion of U.S.-sourced components. 
• Reporting: To qualify for a tax credit, the sale must be reported to the IRS by the dealer or car company, including the buyer’s name, taxpayer identification number, and vehicle identification number.
• Purchaser Income Limitation: The buyer’s adjusted gross income (AGI), which is gross income minus deductions, must be under set upper limits:
  • Married filing jointly or filing as a qualifying surviving spouse, $300,000
  • Head of household, $225,000
  • All other taxpayers, $150,000

The buyer can use their modified AGI from the year the vehicle was delivered or the year before, whichever is less.

Since the IRS is modifying the rules for the credit, potential buyers should consult their tax professional or lawyer before buying a new EV to ensure that the model they are thinking of buying qualifies for the credit. But the possibility of making a positive contribution to solving climate change, saving money on gasoline, and taking advantage of the federal and state tax incentives may mean this could be a good time to buy an EV.