Clean Vehicle Tax Credits

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Updated December 26, 2024

Clean Vehicle Tax Credits

The federal government currently offersClean Vehicle Tax Credits

Prior to the enactment of the FY2025 reconciliation law (P.L. 119-21), the federal government offered three tax credits to incentivize the purchase of clean vehicles (electric vehicles, plug-in hybrid vehicles, and fuel cell vehicles). All three credits were created or substantially modified by P.L. 117- 169, the Inflation Reduction Act of 2022 (IRA). This In Focus summarizes each clean vehicle credit and, provides a brief discussion of relevant economic policy considerations, and discusses the repeal of the credits in the FY2025 reconciliation law..

Clean Vehicle Credit (IRC §30D)

Taxpayers purchasing a qualifying new clean vehicle maycould claim a nonrefundable tax credit of up to $7,500 for vehicles acquired before the end of 2032October 2025. The maximum potential credit ($7,500) iswas the sum of two amounts: the critical mineral amount ($3,750) and the battery component amount ($3,750), which; the credit went into effect for vehicles acquired on or after April 18, 2023. (Fuel cell vehicles without batteries that meet other requirements arewere eligible for the full $7,500 credit, though fuel cell vehicles with batteries arewere subject to the bulleted rules below.)

• ToFor taxpayers to claim the critical mineral portion of the credit, a car’s

battery must have at least a certain percentage of its critical minerals that wereat least a certain percentage of a car battery's critical minerals must have been extracted or processed in the United States or in a country with which the United States has a free trade agreement, or that werehave been recycled in North America. The minimum percentage iswas 40% in 2023, 50% in 2024, and 60% in 202560% in 2025, 70% in 2026, and 80% thereafter. For vehicles acquired after 2024, no applicable critical minerals in the vehicle’'s battery maycould come from a foreign entity of concern (FEOC).

• ToAn FEOC is defined as a nonstate actor that potentially poses an economic or security threat to the United States. For taxpayers to claim the battery component portion of the credit, at

least a certain percentage of an electric vehicle battery’'s component parts must behave been manufactured or assembled in North America. The minimum percentage iswas 50% in 2023, and 60% in 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% thereafter. Furthermore, vehicles. Vehicles acquired after 2023 cannotcould not use battery components manufactured or assembled by an FEOC.

In addition to the critical minerals and battery component requirements, qualifying clean vehicles musthad to meet other criteria. These additional criteria includeincluded a manufacturer’'s suggested retail price (MSRP) limit ($80,000 for vans, SUVs, and pickup trucks; $55,000 for other vehicles); a required gross vehicle weight rating (GVWR) of less than 14,000 pounds; and a battery capacity of at least 7 kilowatt -hours. Additionally,The final assembly of all qualified vehicles must undergo final assemblyhave occurred in North America.

To claim the credit, taxpayers’ must have had modified adjusted gross incomes (MAGIs), for either the current or previous year must be, at or below certain thresholds: $300,000 for married couples, $150,000 for single filers, and $225,000 for heads of household. The clean vehicle credit is

was generally nonrefundable, meaning taxpayers maycould not claim credit amounts in excess of their tax liabilities.

Since the beginning of Starting in 2024, taxpayers have beenwere allowed to transfer their credits to vehicle dealers. Transferred credits may exceed taxpayers’ income tax liabilities, effectively making transferred credits fully refundable. As a requirement for having received a transferred credit, dealers mustDealers who received transferred credits were required to compensate buyers with either a cash payment or a price reduction equal to the value of the credit. Transferred credits could exceed taxpayers' income tax liabilities, effectively making transferred credits fully refundable. Taxpayers who transferredTaxpayers who transfer a credit but later exceed the MAGI limits mustexceeded their MAGI limit were required to pay back the credit (to the IRS) when filing their taxes.

Credit for Previously Owned Clean Vehicles (IRC §25E)

Taxpayers purchasing a qualifying previously owned clean vehicle maycould claim a nonrefundable tax credit equal to 30% of the vehicle’'s sales price, up to a maximum credit of $4,000. This credit iswas commonly referred to as the “"used clean vehicle credit.” Qualifying used vehicles must be acquired before the end of 2032.

The credit can only" Taxpayers could claim the credit only for vehicles acquired before October 2025. The credit could be claimed once per vehicle, and the vehicle mustneeded to satisfy other criteria. The vehicle must behave been purchased from a licensed dealer for $25,000 or less, havehad a GVWR of less than 14,000 pounds, and havehad a battery capacity of at least 7 kilowatt -hours. In addition, the vehicle’'s model year must behave been at least two years before the year of purchase, and the dealer must producehave produced a report of the transaction for both the buyer and the IRS.

Only taxpayers Taxpayers with MAGIs at or below $150,000 for married couples, $75,000 for single filers, and $112,500 for heads of household in either the current or previous year qualifyqualified for this tax credit. Taxpayers cancould claim the credit at most once every three years. Rules for credit transfers under the used clean vehicle credit arewere similar to those under the clean vehicle credit.

Credit for Qualified Commercial Clean Vehicles (IRC §45W)

By purchasing a qualified clean vehicle, businesses and tax- exempt organizations cancould qualify for a tax credit of up to $40,000. For plug-in hybrid vehicles, the credit equalswas equal to the lesser of the incremental cost of the vehicle (the difference between its price and the price of a gas- or diesel-powered vehicle of similar size and use) or 15% of the vehicle’'s cost basis. For electric vehicles and fuel cell vehicles, the credit equalsequaled the lesser of the incremental cost of the vehicle or 30% of its cost basis. The credit maycould not exceed $7,500 for vehicles with a GVWR of less than 14,000 pounds.

The credit for qualified commercial clean vehicles can onlycould be claimed once per vehicle and must satisfy multiplehave satisfied other criteria. The vehicle must behave been used for business purposes, bebeen used primarily in the United States, havehad a battery capacity

Clean Vehicle Tax Credits

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of at least 7 kilowatt hours if the GVWR iswas less than 14,000 pounds (or 15 kilowatt hours otherwise), and bebeen produced by a qualified manufacturer. In addition, the vehicle must behave been either mobile machinery as defined in IRC §4053(8) or a motor vehicle for use on public roads for purposes of Title II of the Clean Air Act. Mobile machinery is defined to include vehicles such as electric tractors while excluding vehicles such as electric golf carts.

The commercial clean vehicle credit iswas nonrefundable, meaning that businesses maycould not claim tax credits in excess of their income tax liabilities. Any unused credits maycould be carried back 1 year or carried forward up to 20 years to offset other years’' tax liabilities. Tax-exempt organizations arewere eligible to receive the credit as a direct cash payment instead of as a nonrefundable tax credit.

Businesses maycould claim the commercial clean vehicle credit for vehicles leased to customers. In some cases, dealers have reportedly claimed credits for leased passenger vehicles, then used these credits to lower customers’' down payments by $7,500. This tax credit exception allowsallowed customers to save up to $7,500 even if the vehicle doesdid not match the MSRP restrictions or domestic content rules from the Clean Vehicle Credit; taxpayers who arewere above the Clean Vehicle Credit income limits can also benefitalso benefited from the loopholeexception. This issue is discussed in greater detail in CRS In Focus IF12603, The Tax Credit Exception for Leased Electric Vehicles, by Nicholas E. Buffie.

How Much Do the Tax Credits Cost and Who Claims Them?

According to the Joint Committee on Taxation (JCT), the three clean vehicle tax credits will reduce revenues by an estimated $21.7 billion over the FY2024-FY2028 budget window. This total is split with corporations claiming an estimated $14.4 billion for the credit for qualifying commercial clean vehicles and individuals claiming an estimated $5.6 billion for the clean vehicle credit and $1.7 billion for the used clean vehicle credit. Table 1 shows the credits’ projected costs by fiscal year.

Table 1. Cost Estimates for Clean Vehicle Tax Credits Billions of Dollars, FY2024-FY2028

2024 2025 2026 2027 2028

Clean Vehicle

Credit

(Individuals)

$1.8 $0.4 $0.5 $0.8 $2.1

Used Clean

Vehicle Credit

(Individuals)

$0.3 $0.3 $0.4 $0.3 $0.3

Credit for

Qualified

Commercial Clean

Vehicles

(Businesses)

$1.6 $2.4 $2.9 $3.5 $4.1

TOTAL $3.7 $3.1 $3.8 $4.6 $6.5

Source: Joint Committee on Taxation, JCX-48-24.

Who Claimed Clean Vehicle Credits?

The pre-IRA tax credit for plug-in electric vehicles (the precursor to the Clean Vehicle Credit) was claimed disproportionately by high-income taxpayers. In 2022, 50% of the credit’'s benefits went to taxpayers in the top 8% of the taxpayer income distribution (those with adjusted gross incomes, or AGIs, of $200,000 or more), and 93% of its benefits went to taxpayers in the top 33% (those with AGIs of $75,000 or more).

The previous tax credit’'s nonrefundable nature likely contributed to the relatively smaller benefits accruing to low-income taxpayers. For credits claimed in 2022, taxpayerscredit recipients with AGIs below $50,000 who claimed the credit received roughly $2,025, compared to $7,443 for taxpayers with AGIs between $100,000 and $500,000. This may changeThese amounts may have changed as more taxpayers transfertransferred fully refundable credits to car dealers. Initial Treasury data for January 1- through February 6, 2024, indicate that roughly 19,500 taxpayers transferred the clean vehicle credit or the used clean vehicle credit to car dealers. Over the same period, 5,500 vehicle sales were reported for purposes of traditional nonrefundable credits.

Clean Vehicle Credit Repeal in the FY2025 Reconciliation Law

The FY2025 reconciliation law, commonly known as the "One Big Beautiful Bill Act," repealed all three credits for vehicles acquired after September 30, 2025. In August 2025, the IRS announced that it would interpret the term "acquired" to mean "paid for," such that if an individual purchased a vehicle before October 1, then took possession of the vehicle at a later date, that individual was eligible for a tax credit. Under prior law, taxpayers could claim credits for vehicles acquired before 2033.

The Joint Committee on Taxation projects that the repeal of these credits will increase federal revenues by $190 billion over the 10-year budget window (FY2025-FY2034). These cost estimates and other aspects of the credits' repeal are discussed in greater detail in CRS Insight IN12625, IRA Tax Credit Repeal in the FY2025 Reconciliation Law: Part 2, by Nicholas E. Buffie.

Complementary Tax Provisions

Complementary Tax Provisions

Federal tax policy also contains a provision that indirectly promotes the adoption of clean vehicles. The Alternative Fuel Vehicle Refueling Property Credit (AFVRPC; IRC §30C) can be claimed by individuals and businesses that install property used to store or dispense clean-burning fuel or to recharge electric motor vehicles in qualifying census tracts. Qualifying census tracts are those designated as low- income for the New Markets Tax Credit (generally having a poverty rate greater than 20% or median family income less than 80% of the statewide or metropolitan area median family income) or those located in nonurban areas.

The credit for individuals The AFVRPC applies to property placed in service before July 2026. For individuals, the AFVRPC is equal to 30% of the cost of the property with a maximum credit of $1,000. For businesses, the credit is equal to 30% of the cost of the property if prevailing wage and qualified apprenticeship requirements are met (or 6% otherwise), with a maximum credit of $100,000 per unit of property.

Federal tax incentives support the clean vehicle market in other ways as well. For example, the clean hydrogen production credit (IRC §§45V) subsidizes the production of hydrogen fuel, which may be used in fuel cell vehicles, and the advanced manufacturing production credit (IRC §§45X) subsidizes production of battery components, which may be used in clean vehicles. In addition, an array of federal tax credits—most notably the Clean Electricity Investment Tax Credit (IRC §48E) and the Clean Electricity Production Tax Credit (IRC §45Y)—subsidize electricity generated by “"clean energy”" sources such as nuclear and renewables. For information on other energy tax incentives, see CRS Report R46865, Energy Tax Provisions: Overview and Budgetary Cost, by Nicholas E. Buffie and Donald J. Marples.

Donald J. Marples, Specialist in Public Finance Nicholas E. Buffie, Analyst in Public Finance

IF12600

Clean Vehicle Tax Credits

https://crsreports.congress.gov | IF12600 · VERSION 3 · UPDATED

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