How Electric Vehicle Tax Credits and Rebates Work

When you buy an electric or plug-in hybrid vehicle (PHEV), it may qualify for a federal tax credit if its final assembly was in North America and it meets other restrictions, such as where the batteries were made and where their components came from.

Eligible electrified vehicles must also meet cost caps: Passenger cars cannot have an MSRP in excess of $55,000 and pickup trucks, vans, and SUVs cannot exceed an MSRP of $80,000.

The MSRP, which is listed on the official window sticker, is the manufacturer’s suggested retail price plus the price of any options or equipment added before the vehicle was delivered to the dealer. It does not include items added by the dealer, and the vehicle’s actual sales price can be higher or lower than the MSRP without affecting tax credit eligibility.

Buyers themselves must meet an income-based eligibility requirement as well. And don’t think about fibbing; the IRS will let you use the current or previous year’s modified adjusted gross income, but if you understate the amount in order to qualify, you’ll be on the hook come tax time for the entire amount of the credit you received.

Currently, a buyer’s modified adjusted gross income cannot exceed $150,000 for an individual, $225,000 for head of household, and $300,000 for those who file  joint returns. If your reported annual income is below these thresholds and your new EV purchase meets the requirements, you should get some level of tax credit.

As of 2024, buyers can now choose whether to use the EV credit to reduce their income tax liability, as before, or to make use of a new “point-of-sale” provision that lets them transfer the credit to a participating new-car dealer and thereby reduce the purchase price. Most dealers participate in the plan.

While taking a tax credit doesn’t translate into direct savings off the purchase price, the “point-of-sale” program in this year’s new rules for EV purchases allow participating dealerships to directly apply an eligible buyer’s tax credit to the purchase of the vehicle for an immediate discount.

Previously, the credit in the past couldn’t exceed a buyer’s actual tax liability for that year; for example, if you only owed $3,000 in federal income taxes, for instance, then that’s all the credit you could claim. However, the new rules for point-of-sale transactions allow buyers to claim the full amount regardless of their actual tax liability.

So, how much is the EV federal tax credit worth? Battery-electric and fuel-cell EVs and plug-in hybrids are all eligible, presuming they meet requirements about vehicle cost, place of manufacture, and origin of battery minerals and other battery components. Those that meet the requirements can qualify for a credit of up to $7,500.

Those who choose to lease a new EV or PHEV can benefit from the tax credit, regardless of where the car was built or where its battery materials came from. That’s because the IRS ruled in late 2022 that leased vehicles fall under the far more lenient tax credit rules for commercial or fleet vehicles.

The leasing entity — usually a new-car dealer or the carmaker’s captive finance arm — actually receives the credit as the vehicle’s first purchaser and has to agree to pass it on to its customers, usually by reducing lease payments. Fortunately, almost all dealers are doing so. Still, it is best to check before signing the paperwork

Those who lease also are exempt from price and income cap requirements.

The federal rules also provide for a 30% tax credit, up to $1,000, against the cost of purchasing and installing a home EV charging station. A home solar energy system to power that charger also can qualify for a 30% tax credit.

In addition to federal tax credits, many states offer rebates when you purchase or lease an electric vehicle. And state eligibility rules typically are not as onerous as the federal rules. No state, for instance, limits eligibility to electrified vehicles assembled in North America, although some do figure in your adjusted gross income.

Incentive programs vary by state, but if you live in a state that has one, you can expect to receive a rebate of $500 to $5,000 for your purchase or lease deal. Some states also offer cash rebates or tax credits to offset the cost of home EV chargers and installation.

Your state may provide owners non-cash incentives as well. Some offer carpool or high-occupancy vehicle (HOV) lane access, which has always been one of the best reasons to choose an electric vehicle. All states also exempt EVs from testing for emissions, which makes sense since electric vehicles don’t produce any.

Not sure what your state offers? The U.S. Department of Energy has a helpful tool you can use to find all the latest state incentives for electric vehicles. TrueCar’s Electric Vehicle Hub also has a ZIP-code based incentive tool that you can use to find the latest rebates near you.

And, for a clearer estimate of your EV’s cost, you can always reach out to the dealership to find out how incentives will affect your purchase or lease.

Your utility company may also offer rebates when you buy or lease a new electric vehicle. The exact amount will vary, along with the fine print specifying how to receive the rebate. But when you combine federal tax credits, state rebates, and utility rebates, the benefits really start to stack up.

Homeowners may also qualify for rebates from their utility company when they install a home charging station and even for installing a solar electric system. A few states also offer discounted electricity rates for EV charging. These incentives are in addition to a separate federal tax credit, where applicable, of 30% of the cost of buying and installing a home charger (up to $1,000), as well as a 30% credit for installing home solar energy systems.

Claiming your EV federal tax credit is a fairly straightforward process. Before you buy an EV, assess your tax situation and ensure that you’ll be able to claim the federal tax credit. Then, decide on the car you want and find out if the automaker has EV tax credits available for buyers.

After you buy your car, the manufacturer will send you  a certificate verifying that the vehicle qualifies for the federal tax credit. Use the information included in that certificate to fill out Form 8936, which you’ll use to complete Form 1040. Submit both forms when you file your income tax return.

First, make sure your adjusted gross annual income doesn’t exceed the federal cap. You have the option of using your prior year’s income or an estimate of your current year’s income. Next, make sure the dealer is participating in the point-of-sale program (the dealership must register with the IRS to do so) and that the vehicle’s MSRP doesn’t exceed the federal caps of $55,000 for cars and $80,000 for pickups, vans, and SUVs.

The MSRP is defined as the retail price set by the manufacturer plus the price of any options or equipment added before the vehicle is delivered to the dealer. It doesn’t include equipment added at the dealership. The actual sales price can be higher or lower than the MSRP without affecting tax credit eligibility.

If you clear those hurdles, tell the dealer how much of the EV tax credit you wish to apply to the purchase price. The dealership will issue you a document called a “seller report” or “time of sale report” that includes the vehicle identification number, the vehicle’s battery capacity, the date of sale, and the sales price (remember, the tax credit is based on the MSRP, not the actual sales price), the maximum tax credit allowed for the vehicle being purchased, and the amount of that credit being applied to the purchase. The report must be given to the buyer no later than the date of the sale.

The federal electric vehicle tax credit is non-refundable, meaning it can reduce your tax liability for the year you purchase your car, but you won’t get the excess as a refund if the credit is worth more than what you owe.

But if you transfer the credit to a dealership and take the value of the credit at the time you make the purchase, you’ll get the full amount for which the vehicle is eligible. That means, for instance, that if you bought an EV eligible for the full $7,500 tax credit and your tax bill for that year is only $6,500, you don’t have to give back the extra $1,000.

State and local tax credits still must be claimed when you file your return for the year, and whether they are refundable depends on individual state tax rules. State and local cash rebates usually are paid directly — often after the purchase is made and the vehicle is registered. In states that tax rebates, they must be shown as income at the end of the year.

In any event, you may want to consult a tax specialist before you buy an electric vehicle.

Some states, such as New York, Vermont, and Connecticut, may classify rebates as taxable income. Others, like California, do not. Everyone’s situation is different, and it’s always a good idea to check your local state regulations. Once again, consider consulting an accountant if you have any questions about how to correctly file your tax return forms.

Thinking of going electric? It’s the perfect time to make the switch. We’ve rounded up some of the best electric vehicles that qualify for the federal tax credit or state and local credits and rebates when purchased new. If you’re just starting your EV adventure, there are more cars available as both gas and electric models than you might think.

Today’s electric vehicles go farther than ever as technology and kilowatt hours of battery capacity continue to improve. Automakers are also hard at work developing all-new electric vehicles and paving the way for EV SUVs and trucks. Teslas still dominate the market, but it’s safe to say that EV options are expanding with every year, from the Ford Mustang Mach-E to General Motors’ Hummer EV.

For a deeper dive into the world of electric vehicles, be sure to check out our EV buying guide.

When you’re ready to buy, you can use TrueCar to shop and get a personalized offer from a certified dealer. Until then, keep an eye out for the latest electric vehicle news and updates from the TrueCar blog.

This article is for informational purposes only and is not intended to substitute for professional tax advice.