The Inflation Reduction Act of 2022 (IRA) is a massive law that aims to curb inflation by reducing the federal budget deficit, tackling high prescription drug prices, and building domestic energy production while promoting clean energy. While it might not sound like it affects you, this bill actually contains quite a few provisions that are designed to directly help individual Americans save money and switch to green technologies.

One such provision is a tax credit designed to help people purchase new or used electric vehicles (EVs) and fuel cell vehicles (FCVs). These cars don’t produce tailpipe emissions, which cuts down on air pollution and greenhouse gases in the environment. They’re quieter, cheaper to power and maintain, and even fun to drive, as they accelerate more quickly than gas-powered cars. In short, they’re a win for the environment and consumers, so the federal government is trying to help people afford the switch.

Unfortunately, the tax credits as written in the original legislation were complicated, they didn’t apply to used cars at all, and only benefitted certain consumers. The government is changing the rules in a way that could make the credits more accessible and equitable. So what’s changing, who qualifies, and how do you take advantage of the savings?

What are these credits, and what is changing?

At first, the legislation just offered a $7500 tax credit if you purchased a new EV. So, if you bought a qualifying EV, you could file a form with your tax return, claim the credit, and lower your tax bill. (Note that a credit is different than a deduction and is generally considered higher impact for the taxpayer because it lowers your tax bill dollar for dollar.)

Importantly, though, the credit is non-refundable, which means it can only lower the amount of your tax bill to $0. So, say your tax bill was $3000 for the year, and you claimed the $7500 new vehicle credit. Your tax bill would drop to $0, but the IRS isn’t going to send you a check for the remaining $4500 of the credit. That money just disappears.

While that’s better than nothing, it didn’t necessarily help everyone purchase a greener car. Cars are a significant purchase for most Americans, especially in this economy! Not everyone can front the cost of the car and hope for a lower tax bill months later. And the fact that the credit is non-refundable meant that the EV tax credit has been most beneficial for those with higher tax bills, which excluded a lot of lower-income Americans from benefitting.

Thankfully, the Biden Administration is working with the IRS and the Treasury to streamline and expand this program. Starting in January 2024, the credit will be transferable to dealers, which means it will function as an instantaneous rebate at the point of sale. Here’s an in-depth explainer of the new rules, but in plain language: if you buy a qualifying green vehicle, you will get a discount off the sticker price at the dealership right when you purchase.

This proposal would make the savings accessible to a lot more people. All consumers who meet the income requirements—not just those with a high tax bill—will be able to take advantage of the credit. And the difference between waiting a year for a lower tax bill and getting a substantial discount while purchasing will help a lot more people afford the switch to a greener vehicle.

How much money is available, and who qualifies?

This part, thankfully, is (almost) simple. The credit is available to individual taxpayers with some income threshold limitations. Here’s a great resource to help you calculate your potential savings based on your situation, but generally:

If you purchase a new qualifying vehicle, you’re able to get up to $7500 in credit as long as you fall under these income thresholds:

• $300,000 for married filing jointly
• $225,000 for heads of households
• $150,000 for all other filers

If you purchase a used qualifying vehicle, you can get up to $4000 in credit, as long as you fall under these income thresholds:

• $150,000 for married filing jointly
• $112,500 for heads of households
• $75,000 for all other filers

The used EV credit amount varies because it is based upon the purchase price of the car. You can receive 30% of the purchase price as a credit, up to $4000. So for example, if you buy a car for $10,000, you’ll get a $3,000 credit.

Which vehicles qualify?

This part, unfortunately, is not so simple, and the rules have changed a few times already. The qualifications are different for new and used cars, too, so it’s hard to keep track!

Frankly, the best thing to do is use the search tool on fueleconomy.gov for up-to-date information on any specific cars you’re considering. This tool is searchable by vehicle, and it also shows you how much of a credit each vehicle will qualify for.

That said, there are some basic qualifications to keep in mind as you’re shopping.

New vehicles put into service after April 18, 2023, need to meet these requirements:

• Have a max MSRP of $55,000 for standard cars or $80,000 for vans, SUVs, and pickup trucks
• Be a plug-in EV or fuel-cell vehicle that has a battery capacity of at least 7 kilowatt hours
• Have a gross vehicle weight rating of less than 14,000 pounds
• Meet critical mineral and battery component requirements

That last part is a little confusing. Basically, the new vehicle credit is split into two parts based upon requirements that involve batteries and materials sourcing. Some new vehicles will only meet one of the two requirements, which would mean you could receive a partial credit of $3750.

For used vehicles, the vehicle needs to meet these requirements to qualify:

• Have a sale price of $25,000 or less
• Be at least 2 years old
• Have a gross vehicle weight rating of less than 14,000 pounds
• Be an eligible FCV or plug-in EV with a battery capacity of at least 7 kilowatt hours

So how do you actually buy a car and claim the credit?

One of the major benefits of the new rules for the credit is that the process will be simple for the consumer. Participating dealerships will register with the government to be able to accept these tax credit transfers. Then, these registered dealerships should be able to help you ensure that your chosen vehicle qualifies and verify that you meet the requirements to claim the credit.

So, while you’re shopping, ask the dealerships if they’re participating in the EV credit program. Then, once you choose a car at a participating dealership, you work with the dealer to transfer your tax credit to them. In turn, the dealer will reduce the purchase price of the vehicle. The dealer gets reimbursed from the IRS, and you’re driving an eco-friendly car home!

Some caveats and fine print

Right now, these new rules for the tax credit are still in a public comment period, which means they could change slightly. Hopefully, this means that by the new year, the rules will be clarified and solidified. That said, check for the finalized rules before you make a purchase in 2024.

Also, depending on where you live, there may be local incentive programs in your state for purchasing an EV. However, some states have restrictions about claiming multiple incentives. Make sure your state doesn’t prohibit “double-dipping” before you claim multiple incentives!

If your adjusted gross income exceeds the limits the year you purchase a car and you got a discount from the dealer based on the tax credit, you will likely need to pay back part or all of that amount come tax time. So, only claim the credit if you’re sure you’re going to qualify!

And generally, while this clean vehicle credit expansion is exciting news for taxpayers looking to go green, it’s still a little vague and complicated— especially given some of the new sourcing requirements and the general complications of our tax system. It’s always a good idea to consider talking to a qualified tax professional, like a CPA, before signing anything that will affect your taxes! But hopefully, this program will help you save money and make the switch to an EV with your next car, and we'll all see a lot more green vehicles on our roads soon.