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Understanding tax incentives for plug-in hybrid vehicles

The Inflation Reduction Act offers funds to help buy plug-in hybrid vehicles – here's what you need to know

Vicky Volvovski
June 4, 2024

Plug-in hybrid vehicles (PHEVs) are a great option for drivers who aren't ready to go fully electric, but want to reduce their fuel costs and pollution on all their local trips. PHEVs qualify for the federal electric vehicle tax incentive. However, the rules are complicated. We try to break down the requirements as simply as possible. This post has two sections:

New PHEV requirements

IMPORTANT: If the car you want does not qualify for the tax incentive, you should consider leasing. Leased PHEVs are eligible for the commercial version of the federal tax credit. Leased PHEVs don't need to meet the strict sourcing and assembly requirements, so many dealerships are encouraging people to lease PHEVs and passing the $7,500 credit to them.

Buyer requirements

A taxpayers's adjusted gross income (AGI) must be below the following thresholds to be eligible for the new PHEV car credit:

Tax-filing status AGI
Head of household less than $225,000
Married, filing jointly less than $300,000
All other filers less than $150,000

You can use your AGI from the year you take delivery of the vehicle or the year before, whichever is less. If your AGI is below the threshold in one of the two years, you are eligible, but you must select a new PHEV that meets the following vehicle requirements.

Price cap

MSRP (manufacturer's suggested retail price) is the retail price of the automobile suggested by the manufacturer, including options, accessories and trim but excluding destination fees. It does not include taxes or other fees added on by the dealer. In order to qualify, the price of the new PHEV must be below these thresholds:

Type of PHEV MSRP
New van, SUV, or pickup truck less than $80,000
All other vehicles less than $55,000

Sourcing requirements

New PHEVs must contain battery and critical minerals sourced from specific parts of the world. If the car meets both critical mineral and battery requirements, it's eligible for the full $7,500 tax credit. If it meets only one of the two, it's eligible for $3,750 tax credit.

Manufacturers are quickly adjusting operations to match these requirements, so the list of cars that qualify is changing rapidly. For the most up to date list, check out the Department of Energy's website, which you can filter to just PHEVs. You'll see a list of cars and in the "Credit Amount" column, how much they qualify for.

Partial list of PHEVs that qualify for the sourcing requirements via the Department of Energy. Visit the website to see the full up to date list.

Assembly requirements

New PHEVs must have final assembly within North America. When purchasing the car, ask the seller to confirm where it was assembled. You can also ask for the car's VIN (vehicle identification number) and plug it into the Department of Energy's VIN checker.

You'll get a result that looks like this:

Plugging in the VIN tells you if the car was assembled in North America or not. Use the Department of Energy's website to check.

Sales requirements

Finally, at the time of sale, you must confirm the following:

  • You buy the vehicle new. New means it hasn't previously been purchased, registered, titled, or used for any purpose. If you're buying a used vehicle, see the Used PHEV requirements section.
  • The seller must report required information to you and to the IRS at the time of sale. Sellers are required to report your name and taxpayer identification number to the IRS for you to be eligible to claim the credit.

Summary

If you meet the threshold for AGI, choose a vehicle that is below the price cap, meets sourcing requirements, assembly, and sales requirements, you can receive the following credit on your taxes:

Tax credit amount
New PHEV meeting both battery and
critical mineral requirement
$7,500
New HEV meeting either battery or
critical mineral requirement
$3,750

Used PHEV requirements

Buyer requirements

A taxpayers's adjusted gross income (AGI) must be below the following thresholds to be eligible for the used PHEV car credit:

Tax-filing status AGI
Head of household less than $112,500
Married, filing jointly less than $150,000
All other filers less than $75,000

You can use your AGI from the year you take delivery of the vehicle or the year before, whichever is less. In addition, you must:

  • Not be claimed as a dependent on another person’s tax return
  • Not have claimed another used clean vehicle credit in the 3 years before the purchase date

If you meet the requirements above, you are eligible, but you must select a used PHEV that meets the following requirements.

Price cap

In order to qualify, the price of the used PHEV must be below the following threshold:

Type of PHEV MSRP
Used PHEV less than $25,000

Vehicle requirements

Used PHEVs must meet a number of requirements in order to be eligible for the credit. For the most up to date list, check out the Department of Energy's website. You'll see a list of cars that looks like this:

Partial list of used PHEVs that meet the vehicle requirements for used cars. Use the Department of Energy's website to see the full list.

Age and transfer requirements

Used PHEVs have a few additional requirements to qualify:

  • Car model must be at least 2 years old
  • Not have been transferred to another buyer after August 16, 2022

Sales requirements

The sale qualifies only if:

  • You buy the vehicle from a dealer. A dealer is a person licensed to sell motor vehicles by the government.
  • The dealer reports required information to you and to the IRS at the time of sale. Required information includes: dealer's name and taxpayer ID number, buyer's name and taxpayer ID number, sale date and sale price, maximum credit allowable under IRC 25E, Vehicle identification number (VIN), battery capacity

Summary

If you meet the buyer requirements, choose a used vehicle that is below the price cap, meets the vehicle, age, and transfer requirements, you can receive the following credit on your taxes:

Tax credit amount
Used PHEV 30% of price up
to $4,000

Note that you must have a federal tax liability to claim the credit. For example, if you owe $10,000 in federal taxes and qualify for the full $7,500, you can claim the full $7,500. However, if you only owe $5,000 in federal taxes, you can only claim $5,000.

To claim the credit, you'll fill out Form 8936 with your federal taxes.

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