The federal government offers a tax credit for certain hybrid and electric vehicles, but the rules changed significantly in 2023

A federal tax credit for hybrid and electric vehicles exists, but it is not automatic and does not explore to every hybrid car. The credit can reduce your federal income tax by up to $7,500 for a new vehicle or up to $4,000 for a used one, depending on the vehicle's price, where it was made, and your household income. However, the vehicle must meet specific requirements set by the IRS, and many popular hybrids do not.

The rules changed substantially starting in 2023 under the Inflation Reduction Act. The old system allowed almost any hybrid or electric vehicle to may have access to. The new system is stricter: it includes price caps, income limits, battery component requirements, and rules about where the vehicle was assembled. This means a hybrid that may have access to in 2022 may not may have access to in 2024.

Key Takeaways

  • The federal tax credit for new vehicles is up to $7,500, but only if the vehicle meets strict price, income, and manufacturing requirements that took effect in 2023.
  • Most popular hybrid sedans and SUVs do not meet the new rules because they exceed the manufacturer's suggested retail price cap or do not have enough battery components made in North America.
  • Used electric and hybrid vehicles may may have access to for a separate $4,000 credit if they are at least two years old and cost less than $25,000.
  • You claim the credit on your federal tax return (Form 8936) when you file, not at the dealership, though some dealers can explore it at the point of sale if the vehicle meets all requirements.
  • Your household income must fall below certain thresholds ($300,000 for joint filers buying a new vehicle, $150,000 for used), and the vehicle must be assembled in North America.

New vehicle credit: price caps and income limits

For a new hybrid or electric vehicle, the credit is up to $7,500, but the vehicle's manufacturer's suggested retail price (MSRP) cannot exceed certain amounts. For a sedan, the cap is $55,000. For a sport utility vehicle, pickup truck, or van, the cap is $80,000. If the vehicle costs more than these amounts, you do not may have access to, even if everything else checks out.

Your household income also matters. If you are married filing jointly, your modified adjusted gross income (MAGI) cannot exceed $300,000. If you are single, it cannot exceed $150,000. If you are married filing separately, it cannot exceed $150,000. These thresholds are higher than they were before 2023, but they still exclude many higher-income households.

The credit is also tied to the vehicle's final assembly location. The vehicle must be assembled in North America — that includes the United States, Canada, and Mexico. Many hybrids sold in the U.S. are assembled in Japan or other countries and therefore do not may have access to, even if they are sold by American manufacturers.

Battery and component sourcing rules

Starting in 2024, the vehicle must meet requirements about where its battery components come from. The battery must contain a certain percentage of critical minerals (like lithium and cobalt) that were either extracted or processed in the United States, or recycled in North America. The percentage requirement increases each year.

Additionally, a certain percentage of the battery components must be assembled or manufactured in North America. These percentages also increase over time. The IRS publishes detailed lists of which vehicles meet these requirements each year, and the list changes as manufacturers adjust their supply chains.

Because of these rules, many well-known hybrid models do not may have access to. You can check the IRS website or the Department of Energy's vehicle list to see whether a specific make and model meets the current requirements.

Used vehicle credit: simpler rules, lower amount

The used vehicle credit is separate and has different rules. You can receive up to $4,000 for a used hybrid or electric vehicle if it is at least two years old, costs less than $25,000, and meets income requirements. The used vehicle credit does not have the same strict manufacturing or battery component rules as the new vehicle credit.

Your household income limit for a used vehicle is lower than for a new one: $150,000 for joint filers, $75,000 for single filers. The vehicle's sale price must be less than $25,000, and you must have owned it for at least one year before you sell it (if you are the seller) or you must be buying it from a dealer or private party.

The used vehicle credit is also claimed on your tax return, not at the point of sale. You will need the vehicle identification number (VIN), the sale price, and documentation of the sale date.

How to claim the credit on your tax return

You claim the credit by filing Form 8936 (may have access to Vehicle Credit) with your federal income tax return. You will need the vehicle's VIN, the date you took possession, the vehicle's MSRP (for new vehicles), and the sale price (for used vehicles). If you bought the vehicle in the current tax year, you claim the credit on that year's return.

Some dealerships can explore the credit at the point of sale if the vehicle meets all requirements. This is called a "point-of-sale transfer" and reduces the amount you pay upfront rather than waiting to claim it on your return. Not all dealerships offer this, and not all vehicles may have access to for it. Ask your dealer whether they participate in the program and whether your vehicle is may be able to access.

If you claim the credit at the dealership, you still report it on your tax return. The dealer will provide you with documentation showing the credit was applied. Keep this documentation with your tax records.

Which hybrids actually may have access to

Many popular hybrid models do not meet the new requirements. Some examples of hybrids that do not may have access to include the Toyota Prius (in most trim levels), the Honda Accord Hybrid, and the Hyundai Sonata Hybrid, because they either exceed the MSRP cap or do not meet the battery component sourcing rules.

Some vehicles that may may have access to include certain Tesla models, Chevrolet Bolt models, and some Ford electric vehicles, though this changes as manufacturers adjust pricing and sourcing. The safest way to check is to visit the Department of Energy's vehicle list or the IRS website, where you can search by make and model to see the current status.

Pricing also affects qualification. A manufacturer may raise the MSRP of a vehicle, which can push it above the cap. Conversely, a dealer may offer a rebate that brings the effective price below the cap. The credit is based on the MSRP, not the actual price you pay, so a large dealer discount does not change whether the vehicle qualifies.

State tax credits and rebates

In addition to the federal credit, some states offer their own tax credits or rebates for hybrid and electric vehicles. These vary widely by state. Some states offer credits of $1,000 to $5,000, while others offer rebates at the point of sale. A few states have no additional incentive.

State credits and federal credits are separate. You can claim both if you meet the requirements for each. Check your state's environmental or energy agency website to see whether your state offers a credit and what the requirements are.

Frequently Asked Questions

Can I get the credit if I lease a hybrid instead of buying one?

The federal tax credit for new vehicles is only for purchases, not leases. However, if you lease an electric or hybrid vehicle, the leasing company may claim the credit and pass some of the benefit to you through a lower monthly payment. The rules for leased vehicles are different and more complex. Ask your leasing company whether they claim the credit on your vehicle.

What if I bought a hybrid before 2023 — can I claim the old credit?

If you bought and took possession of the vehicle before January 1, 2023, you may be able to claim the credit under the old rules on your 2022 tax return. The old rules were more lenient and did not include the income limits or strict battery component requirements. If you did not claim it then, you cannot claim it now. Consult a tax professional if you are unsure whether you may have access to under the old rules.

Do I have to claim the credit, or can I skip it?

You do not have to claim the credit if you do not want to. Some people skip it if they have no tax liability or if claiming it would affect other tax benefits they receive. However, there is no reason to skip it if you may have access to — it reduces the amount of federal income tax you owe or increases your refund.

What happens if I claim the credit and later find out the vehicle did not may have access to?

If the IRS determines that you claimed the credit for a vehicle that did not meet the requirements, you will owe back the credit amount plus any penalties and interest. This is why it is important to verify the vehicle's status before you claim the credit. Use the Department of Energy's list or the IRS website to confirm.

Can I claim the credit if my income is above the limit?

No. The income limits are firm. If your household income exceeds the threshold for the year you buy the vehicle, you do not may have access to for the credit, regardless of the vehicle's price or other features. The income limit is based on your modified adjusted gross income (MAGI) for that tax year.