How does the electric car tax credit work? When to buy.
Electric vehicles are becoming increasingly widespread. Last year, they accounted for 7.1% of all new cars purchased. Look for these numbers to take another leap forward in the future as $7,500 tax breaks go into effect for certain electric cars and trucks.
It’s part of the Curbing Inflation Act, a landmark law passed in August 2022 that provides financial incentives for Americans to buy electricity when it comes to cars and appliances. as the country moves away from fossil fuels. There are also incentives for upgrading appliances and greening your home.
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This could go a long way in helping the United States transition to carbon-free energy. Transportation was the largest source of greenhouse gas emissions in the United States in 2022, according to the Sustainable Energy in America 2023 Factbook.
Although the law itself was passed eight months ago, many details are still being worked out, so it’s not easy to determine whether you or the car you want qualifies and much remains to be seen. suspense. You’ll need to check your personal eligibility and car eligibility carefully – and the latter can change quickly.
The tax credit may soon become more difficult to access, when battery supply requirements come into play, may restrict eligible cars. But things should get easier in 2024 when you can transfer the tax credit to your dealership to get an initial discount.
Here’s what you need to know, for now, about tax credits for electric vehicles:
Conclusion: When should you buy an EV?
- Almost ready to buy? Do it soon – like now. The number of eligible vehicles could decrease in 2023, for complex reasons that you will discover below. If you’re close to buying, move quickly for the most options and the best chance of saving.
- Still looking? Take your time – 2024 might be a better time to buy. The rules will be finalized in the coming months and dealers may be able to offer you discounts as early as next year. Overall, getting these discounts should be a smoother experience if you’re able to wait.
Who is eligible for EV tax credits? Which vehicles are eligible?
The law gives buyers of eligible vehicles up to $7,500 in tax credit for the purchase of a new electric vehicle (EV) or plug-in hybrid and up to $4,000 for a used vehicle. However, there are income limits and price caps.
Income eligibility limits:
- Households jointly declaring earning $300,000 or less.
- Household heads earning $225,000 or less.
- Single taxpayers earning $150,000 or less
Vehicle requirements:
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What’s the catch?
The money is only available in the form of non-refundable tax credits. This means that you cannot recover more money in tax refunds than you actually owe in taxes.
Let’s say you buy a Chevy Bolt for $27,000. If your household pays the federal government at least $7,500 in taxes and you otherwise qualify for the credit, your tax bill will be reduced accordingly.
If you only owe $3,000 in taxes, you can only get a $3,000 credit, even if you were eligible for the full $7,500, said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting.
On average, in 2020, Americans with adjusted gross income between $50,000 and $75,000 paid $4,567 in taxes, according to the IRS. Those who earned between $75,000 and $100,000 paid $7,363.
That means middle- and upper-income families are most likely to take advantage of tax credits because of the way the law was drafted, said Sage Briscoe, senior federal policy officer for implementation with Rewiring. America, a non-profit electrification organization.
“Non-refundable tax credits favor those with larger tax bills, and those tend to be higher income people,” she said.
A new battery rule may change things
The IRA contains language requiring that critical minerals and battery components used in an electric vehicle be purchased or recycled in North America, but this has not been fully specified. The requirements are also getting stricter over time, as Congress wanted to encourage automakers to move electric vehicle battery production to the United States.
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Soon – possibly by the end of March – the IRS will issue new regulations detailing how this will work. These are some of the more complex parts of the IRA Clean Vehicle Credit.
Once the regulations take effect, “many vehicles currently eligible for the full $7,500 credit will likely only be eligible for half the credit,” said Chris Harto, senior energy policy analyst for Consumer Report.
To avoid this, you’ll need to purchase — and take delivery — of an EV before the rules are released.
“If they say you’ll get it in May, then maybe you’re stuck,” Briscoe said.
Electric vehicle tax credits will change again in 2024
Starting in 2024, buyers can also transfer the electric vehicle tax credit to the dealership, so they get the $7,500 as an initial rebate.
Exactly how this will unfold is not yet known.
“It’s unclear how the dealership will know you’re eligible for full credit,” Luscombe said. “Maybe that’s why it was delayed for a year so the IRS could figure it out.”
It’s also possible that some EV manufacturers whose vehicles don’t qualify because they’re too expensive will offer to match the tax credit, so definitely check their websites.
Get up to $1,000 off an EV charger installation
Once you have an electric vehicle, you may want a home electric vehicle charger. The IRA renews a tax credit that covers 30% of the installation cost, up to $1,000.
As written, the law includes geographic restrictions on where credit can be used to encourage the installation of public charging stations in low-income and rural areas.
Check the Rewiring America website to see if you qualify.
Use these calculators to see if you qualify
The Inflation Reduction Act tax credits for electric vehicles are so complex that consumers should be careful, said Keith Barry, automotive editor at Consumer Reports.
“You should always double-check your dealer’s calculations,” he said. “That doesn’t mean they’re doing anything malicious – buying a car is a very complex process. Car salespeople aren’t accountants.”
Consumer Reports, long a go-to for car shoppers, has a tool for understanding electric vehicle incentives and tax credits.
Rewiring America also offers a comprehensive web calculator for all IRA tax credits and rebates.
USA Today
