While most of the buzz about the Inflation Reduction Act of 2022 focuses on the big changes in the new electric vehicle (EV) tax credits it ushers in, the bill also contains groundbreaking changes for potential used EV buyers. Lawmakers have created an incentive to help used EV buyers for the first time. The savings offered have strict limits, but could make buying a pre-owned EV more viable for people with low to moderate income.

A few key details about the used EV tax credit remain unclear. Depending on exactly how finalized rules apply to used electric vehicles, dozens of models might qualify, or as few as eight. Regardless, this new part of the Clean Vehicle Credit system is a big step forward from the previous EV credit scheme. Used EVs didn’t qualify for tax benefits at all under the earlier system. Regardless of how exactly the new qualifications are applied, it’s becoming easier to own a used EV than ever before. Here’s a look at the details.

The Used EV Tax Credit: Background

The Biden administration completely revamped the existing EV tax credit structure with the recently passed Inflation Reduction Act. Previously, EV purchasers could claim up to $7,500 in tax credits if their vehicle met several prerequisites. These included a payment based on battery sizes above a 4-kilowatt-hour capacity. Eligibility under the previous law also phased out a specific company once it had sold 200,000 EVs in total.

The new credit system, called the Clean Vehicle Credit, eliminates the 200,000-EV phaseout. This makes future vehicles from electric vehicle giants, like Tesla, potentially eligible for tax credits again. It now uses several different factors to decide if a vehicle purchaser gets a partial ($3,750) or full ($7,500) benefit. New EV eligibility is based on purchaser income and the vehicle’s price, among other details. The Congressional Research Service published a report detailing these changes.

Most importantly for people interested in an affordable used EV, some pre-owned EVs now get a tax credit. Policymakers have set a maximum credit of $4,000, though.

The system for determining if a used EV qualifies for a tax credit is different from a new EV in most ways. Used EVs are even exempt from several stringent controls on new EV eligibility. Both new EVs and used EVs, though, can only get a tax credit if their manufacturing includes “final assembly” in North America (the USA or Canada).

The Used EV Tax Credit: How It Works

The new rules state that used EV tax credits will become available on January 1, 2023. Only used EVs selling for $25,000 or less can qualify for the credit. The potential amount of tax credit received is 30% of purchase price. Lawmakers decreed a $4,000 cap on this amount, which is reached at a used EV price of $13,333.33. Below $13,333.33 buyers receive a smaller tax credit. For example, an $8,000 used EV would offer a $2,400 credit, while a $5,500 vehicle would be eligible for $1,650 credit. Once the $13,333.33 threshold is crossed, the credit remains at a flat $4,000 up to $25,000.

The tax credit is applicable at the time of purchase. As a result, the used EV’s buyer gets the credit as an immediate discount to the purchase price. The credit is transferred to the seller, who can claim the tax deduction later. This up-front credit system is designed to make it financially easier for less affluent buyers to afford a used EV.

The buyer’s income also sets a threshold for eligibility. Used EV purchasers lose the tax credit depending on their tax filing status and adjusted gross income (AGI). The used EV credit’s cutoff is $75,000 AGI (single filers), $112,500 (head of household), or $150,000 (married filing jointly).

Additionally, only vehicles with a model year two years prior to the purchase date can qualify. In 2023, when the rule goes into effect, 2021 model year or earlier EVs will be eligible, 2022 used EVs become eligible in 2024, and so on. This might seem complex and restrictive, but there are even more eligibility limits based on conditions of sale.

Dealership Requirements and Other Limits

Private sales of used EVs can’t claim the tax credit regardless of price. The buyer must purchase the used EV from a licensed dealership to remain eligible for the credit. Additionally, the dealership can’t operate like a standard used car dealer, buying and selling used EVs repeatedly. A used EV only qualifies for the tax credit once, the first time it’s sold as used after being bought new. This will effectively limit credit-eligible EVs to trade-ins brought to the dealership when a driver upgrades to a new model.

Used EVs sold more than once are no longer eligible for a credit, no matter who offers them for sale. Policymakers also restrict buyers from getting the credit more than once per three-year period. For instance, if an individual buys a used EV on August 15, 2023 and receives a tax credit for it, they can’t qualify for a tax credit even on another otherwise eligible used EV until August 16, 2026.

The Used EV Tax Credit: How to Get It

Finding a Qualifying Used EV

The used EV tax credit is an exciting concept for those wanting a more affordable pre-owned electric vehicle. On the other hand, consumer demand for used cars went orbital during the COVID-19 pandemic. Lockdowns and closures slashed semiconductor chip supply, creating a manufacturing bottleneck for new cars. As early as a year ago, in August 2021, used car prices had already soared 26%, The Mercury News reported.

People’s interest in EVs is growing strongly, too. EV carmakers can’t keep pace with the public’s thirst for electrification, so used EV purchases are booming. Research by Recurrent Auto reveals average used EV prices skyrocketed to $40,714 by July 2022, driven by shortages of new EVs.

The same statistics indicate used EVs priced under $25,000 are only about 18% of those on offer. With demand so high, significantly falling prices seem unlikely in the near future. As auto buyers continue looking for pre-owned EVs, used EV prices have jumped almost 10% since summer 2021. This rise outpaces the roughly 7% overall price increase in the whole EV market during the year.

Locating a used EV still in good enough shape to drive yet under the $25,000 cutoff may be challenging. Only about 1 in 5 EVs are likely to meet the $25,000 threshold for the used EV tax credit. Buyers locating a used EV with a low enough price to qualify have only cleared the first hurdle to getting a tax credit.

Used EVs Meeting the U.S. Assembly Requirement

The government’s choice to use the same eligibility requirements for used EVs as for new ones limits tax credit availability further. Not only must a used EV cost under $25,000, which most don’t, but it must be assembled in North America. This rule narrows the field of eligible used EV models to the single digits.

According to CarBuzz, average used selling prices and the North American assembly stipulation shortens the list to eight vehicles. When used EV credits become available on the first day of 2023, few existing EVs will be built in North America, cost under $25,000 on average, and be two years old or more. The list includes the Cadillac ELR, Chevy Volt, Chevy Bolt, Ford Focus Electric, Ford C-Max Energi, Ford Fusion Energi, Fiat 500e, and Nissan Leaf.

Many qualifying vehicles are PHEVs rather than full EVs, with electric-only ranges under 25 miles. Most are small, while American car buyers are known to favor large vehicles, whether gasoline, diesel, or electric-powered. Purchaser choice is extremely limited. Because of the two-year qualification lag, numerous restrictions, and continued EV automaker focus on high-end models, options probably won’t grow significantly soon.

Used EV Tax Credit: Summary

The qualifications a used EV has to meet to be eligible for an up to $4,000 tax credit are as follows:

  • Must be sold at a licensed dealership (no private used EV sales qualify)
  • Must not have a buyer and seller who are family relatives
  • Must be sold on the used market for the first time
  • Buyer must have income at or below $75,000 (single), $112,500 (head of household), or $150,000 (married filing jointly)
  • Buyer can only receive one used EV tax credit every three years
  • Must cost $25,000 or less
  • Must be from a model year at least 2 years prior to the year of purchase
  • Must have received “final assembly” in the USA or Canada during manufacturing
  • Must be bought on or after January 1, 2023 and before 2032

The government’s willingness to extend the Clean Vehicle Credit to used EVs is a key change in thinking. Previous tax credits didn’t apply to pre-owned EVs at all; however, getting the used EV credit is currently something you’ll be able to do only under very specific circumstances. The numerous rules mean lower-income buyers can potentially choose from a very limited selection of small EVs and PHEVs, mostly Chevrolet Bolts and Nissan Leafs, if available at a dealership.

The $4,000 Used EV Tax Credit Explained, and How to Get it FAQs (Frequently Asked Questions) 

Does the used EV tax credit apply to all used EVs?

No, only those meeting the set of guidelines explained above are eligible.

Can I buy a privately sold used EV and receive the tax credit?

Used EV tax credits apply only to used EVs sold by a licensed dealership.

Do used EVs need to meet the same “critical materials” requirement as new ones?

Used EVs are exempted both from the “critical materials” rule of the Inflation Reduction Act and from the battery component assembly rules. However, the EV’s final assembly still must have taken place in North America for it to potentially qualify.

When will the used EV credit be available?

The tax credit will be available from January 1, 2023 until 2032, when the Inflation Reduction Act and all its EV tax credit provisions expire.

Can I buy several used EVs and get a tax credit on each of them?

No, a buyer can only get a total of one used EV tax credit every three years.

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  • Congressional Research Service Available here: https://crsreports.congress.gov/product/pdf/IN/IN11996
  • JD Surra Available here: https://www.jdsupra.com/legalnews/the-ira-s-electric-vehicle-and-battery-3876820/
  • Yahoo! Finance (1970) https://finance.yahoo.com/news/automoblog-explains-ev-tax-credit-124300392.html
  • The Mercury News Available here: https://www.mercurynews.com/2021/10/15/why-used-car-prices-have-soared-during-the-pandemic/
  • Recurrent Auto Available here: https://www.recurrentauto.com/research/used-electric-vehicle-buying-report
  • Car Buzz Available here: https://carbuzz.com/news/only-8-used-vehicles-will-qualify-for-new-4000-tax-credit