Jackyenjoyphotography | Even | Getty Images
Why the new EV credit is more difficult to claim
From August 17, for example final assembly of the car had to take place in North America.
The last two requirements – which apply to the procurement of automotive battery components and critical minerals – will take effect April 18 and will be phased in over a few years, said the Ministry of Finance.
More from personal finance:
Are you tax-savvy? Take our quiz to find out
What the $80 Billion IRS Financing Plan Means for Taxpayers
Here’s a ten-year guide to building wealth
Lawmakers’ goal is to encourage automakers to build batteries with domestic supply chains rather than relying on countries like China for essential parts.
In the short term, however, it is expected that the current list of cars those eligible for the $7,500 credit will drop in numbers, at least until manufacturers are able to comply with the new battery rules.
The IRS will update that list of eligible EVs on April 17. At that point, the cars currently eligible for a tax break may be associated with a smaller or no tax break at all, perhaps only temporarily.
$4,000 credit for used EVs has fewer terms
Krisztian Bocsi/Bloomberg via Getty Images
The Inflation Reduction Act also created a tax credit for consumers purchasing used electric or fuel cell vehicles.
The used car tax credit, which took effect in 2023, is worth $4,000 or 30% of the sale price, whichever is less.
This “previously owned clean vehicle credit” does not include production rules associated with new EVs – representing a possible solution for consumers who are in the market for an EV and want to maximize their tax savings.
“If the new vehicle you want doesn’t qualify (for the $7,500 credit), you may be able to save some money (buying a used electric car) and get a tax break,” says Ingrid Malmgren, policy director at Plug In America .
The used vehicle credit applies to a wide selection of cars, she said. Consumers can IRS list to check which used vehicles are eligible.
Here are some of the main criteria for cars and consumers to qualify for the credit:
The car must be purchased from an authorized dealer. The model year of the car must be at least 2 years old. The sale price must be $25,000 or less. It is only available to individuals, not to companies. Buyers are not eligible for a credit if their annual income exceeds certain thresholds: $75,000 for singles, $112,500 for heads of household, and $150,000 for married couples filing joint tax returns. Buyers assess income for the year they bought the car or the previous year, whichever is less. (Income is measured as “modified adjusted gross income.” You can refer to these frequently asked questions to determine how to calculate modified AGI.)
However, those income limits are “much lower” than those that apply to the $7,500 new vehicle tax credit, said Katherine Breaks, general manager of KPMG’s tax credit and energy advisory group. The income thresholds for new cars are double those for used EVs.
Both the new and used credits are non-refundable, meaning car buyers must have a tax liability to get any value from the tax breaks.
“If I don’t have $4,000 in tax debt, what’s the tax credit worth to me? Not much,” Breaks said of the used vehicle credit.
However, from 2024, a new mechanism will come into effect for new and used cars, whereby buyers can transfer their tax credits to dealers. Dealers may be able to convert the tax break into a point-of-sale discount for consumers instead of a benefit that can only be claimed when filing an annual tax return, experts said. The IRS plans to issue additional guidance on this transfer provision.
A $7,500 tax credit for leasing a new electric car
Matt Cardy | Getty Images News | Getty Images
Alternatively, consumers also seem poised to get a tax break worth up to $7,500 for leasing new electric passenger cars.
And this tax break doesn’t have the production requirements associated with new car purchases, Malmgren said. That means a larger number of vehicles are likely to qualify initially, making the provision somewhat of a loophole for consumers eager to lease a car.
“There are very few restrictions that apply,” Malmgren said.
The Inflation Reduction Act created this”qualified credit for commercial clean vehicles” for business owners. Automakers have affiliated leasing or financing arms that buy electric vehicles for commercial purposes and then lease the cars to consumers — at which point they can pass on the associated tax credit, Malmgren said.