Clean Vehicle Tax Credits
February 27, 2024
Clean Vehicle Tax Credits
The federal government currently offers three tax credits
To claim the credit, taxpayers’ modified adjusted gross
that reduce clean vehicle purchase prices and thus may
incomes (MAGIs) for either the current or previous year
increase demand for clean vehicles (e.g., electric vehicles,
must be at or below certain thresholds: $300,000 for
plug-in hybrid vehicles, and fuel cell vehicles). Each clean
married couples, $150,000 for single filers, and $225,000
vehicle credit was created in the Energy Improvement and
for heads of household. The clean vehicle credit is
Extension Act of 2008 (Division B of P.L. 110-343) and
nonrefundable, meaning taxpayers may not claim credits in
subsequently modified by P.L. 117-169 (commonly referred
excess of their tax liabilities.
to as the Inflation Reduction Act or IRA). This In Focus
summarizes each clean vehicle credit and provides a brief
Starting in 2024, taxpayers may elect to transfer the clean
discussion of relevant economic policy considerations.
vehicle credit to the vehicle dealer. The transferred credit
may exceed the taxpayer’s income tax liability, effectively
Clean Vehicle Credit (IRC §30D)
making transferred credits fully refundable. Taxpayers who
Taxpayers purchasing a qualifying new clean vehicle may
transfer the credit but later exceed the MAGI limits must
claim a nonrefundable tax credit of up to $7,500 for
pay back the credit (to the IRS) when filing their taxes.
vehicles placed in service through the end of 2032. The
maximum potential credit ($7,500) is the sum of two
Credit for Previously Owned Clean
amounts: the critical mineral amount ($3,750) and the
Vehicles (IRC §25E)
battery component amount ($3,750), which went into effect
Taxpayers purchasing a qualifying previously owned clean
for vehicles placed in service on or after April 18, 2023.
vehicle may claim a nonrefundable tax credit equal to 30%
(For vehicles placed in service in 2023 prior to April 18,
of the vehicle’s sales price, up to a maximum credit of
2023, the critical mineral and battery components were not
$4,000. This credit is commonly referred to as the “used
applicable.)
clean vehicle credit.” Qualifying used vehicles must be
acquired before 2033.
• To claim the critical mineral portion of the credit, a car’s
battery must have at least a certain threshold percentage
The credit can only be claimed once per vehicle, and the
of its critical minerals that were extracted or processed
vehicle must satisfy other criteria. The vehicle must be
in the United States or in a country with which the
purchased from a licensed dealer for $25,000 or less, have a
United States has a free trade agreement, or that were
GVWR rating of less than 14,000 pounds, and have a
recycled in North America. The threshold percentage is
battery capacity of at least 7 kilowatt hours. In addition, the
40% in 2023, 50% in 2024, 60% in 2025, 70% in 2026,
vehicle’s model year must be at least two years before the
and 80% thereafter. For vehicles placed in service after
year of purchase, and the dealer must produce a report of
2024, no applicable critical minerals in the vehicle’s
the transaction for both the buyer and the IRS.
battery may come from a “foreign entity of concern.”
Only taxpayers with MAGIs at or below $150,000 for
• To claim the battery component portion of the credit, at
married couples, $75,000 for single filers, and $112,500 for
least a certain percentage of an electric vehicle battery’s
heads of household in either the current or previous year
component parts must be manufactured or assembled in
qualify for this tax credit. Taxpayers can claim the credit at
North America. The threshold percentage is 50% in
most once every three years. Rules for credit transfers under
2023, 60% in 2024 and 2025, 70% in 2026, 80% in
the used clean vehicle credit are similar to those under the
2027, 90% in 2028, and 100% thereafter. In addition,
clean vehicle credit.
vehicles placed in service after 2023 cannot use battery
components manufactured or assembled by a “foreign
Credit for Qualified Commercial Clean
entity of concern.”
Vehicles (IRC §45W)
By purchasing a qualified clean vehicle, businesses and tax-
In addition to the critical minerals and battery component
exempt organizations can qualify for a tax credit of up to
requirements, qualifying clean vehicles must meet other
$40,000. For hybrid vehicles, the credit equals the lesser of
criteria. These additional criteria include a manufacturer’s
the incremental cost of the vehicle (the difference between
suggested retail price (MSRP) cap ($80,000 for vans,
its price and the price of a gas- or diesel-powered vehicle of
SUVs, and pickup trucks; $55,000 for other vehicles); a
similar size and use) or 15% of the vehicle’s cost basis. For
gross vehicle weight rating (GVWR) of less than 14,000
electric vehicles and fuel cell vehicles, the credit equals the
pounds; and a battery capacity of at least 7 kilowatt hours.
lesser of the incremental cost of the vehicle or 30% of the
Additionally, all qualified vehicles must undergo final
vehicle’s cost basis. The credit may not exceed $7,500 for
assembly in North America.
vehicles with a GVWR of less than 14,000 pounds.
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Clean Vehicle Tax Credits
The credit for qualified commercial clean vehicles can only
claimed by high-income taxpayers. For vehicles purchased
be claimed once per vehicle and must satisfy multiple other
in 2021, taxpayers with adjusted gross income (AGI)
criteria. The vehicle must be used for business purposes, be
greater than $100,000 represented 22% of all filers and
used primarily in the United States, have a battery capacity
received 84% of the credit benefits.
of at least 7 kilowatt hours if the GVWR is less than 14,000
pounds or 15 kilowatt hours otherwise, and be produced by
The previous tax credit’s nonrefundable nature likely
a qualified manufacturer. In addition, the vehicle must be
contributed to the relatively smaller benefits accruing to
either mobile machinery as defined in IRC §4053(8) or a
low-income taxpayers. For vehicles purchased in 2021,
motor vehicle for use on public roads for purposes of Title
taxpayers with AGIs between $25,000 and $50,000 who
II of the Clean Air Act. Mobile machinery is defined to
claimed the credit received roughly $1,750 per tax return
include vehicles such as electric tractors while excluding
compared with roughly $6,900 for taxpayers with AGIs
vehicles such as electric golf carts.
between $100,000 and $500,000. This may change as more
taxpayers transfer fully refundable credits to car dealers.
The commercial clean vehicle credit is nonrefundable,
Initial Treasury data for January 1-February 6, 2024,
meaning that businesses may not claim tax credits in excess
indicate that roughly 19,500 taxpayers transferred the clean
of their tax liabilities. Any unused credits may be carried
vehicle credit or the used clean vehicle credit to car dealers.
back 1 year or carried forward up to 20 years to offset other
Over the same period, 5,500 vehicle sales were reported for
years’ tax liabilities, however. Tax-exempt organizations
purposes of traditional nonrefundable credits.
are eligible to receive the credit as a direct cash payment
instead of as a nonrefundable tax credit.
Complementary Provisions to the Clean Vehicle
Tax Credits
How Much Do the Tax Credits Cost and
Federal tax policy also contains a provision that indirectly
Who Claims Them?
promotes the adoption of clean vehicles. The Alternative
According to the Joint Committee on Taxation (JCT), the
Fuel Vehicle Refueling Property Credit (IRC §30C) can be
IRC §30D and §45W clean vehicle tax credits will reduce
claimed by individuals and businesses that install property
revenue by an estimated $34 billion over the FY2023-
used to store or dispense clean-burning fuel or to recharge
FY2027 budget window. This total is split with
electric motor vehicles in qualifying census tracts.
corporations claiming an estimated $15 billion for the credit
Qualifying census tracts are those designated as low income
for qualifying commercial clean vehicles and individuals
for the New Markets Tax Credit (generally having a
claiming an estimated $19 billion for the clean vehicle
poverty rate greater than 20% or median family income less
credit. The used clean vehicle credit has a de minimis cost
than 80% of the statewide or metropolitan area family
projection, meaning that its estimated cost over the next
income) or those located in nonurban areas.
five years is less than $250 million.
The credit for individuals is equal to 30% of the cost of the
Figure 1.Tax Expenditure Estimates for Federal Clean
property with a maximum credit of $1,000. For businesses
Vehicle Tax Credits
the credit is equal to 30% of the cost of the property if
Billions of dollars, FY2023 through FY2027
prevailing wage and qualified apprenticeship requirements
are met (6% otherwise) with a maximum credit of $100,000
per piece of property.
Federal tax incentives may complement 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. Federal tax support
for clean vehicles is by no means limited to the clean
vehicle credits themselves.
Source: Joint Committee on Taxation, JCX-59-23
Donald J. Marples, Specialist in Public Finance
Nicholas E. Buffie, Analyst in Public Finance
The pre-IRA tax credit for plug-in electric vehicles (the
IF12600
precursor to the clean vehicle credit) was disproportionately
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Clean Vehicle Tax Credits
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https://crsreports.congress.gov | IF12600 · VERSION 1 · NEW