POLITICS

New Federal EV Tax Credits To Kick In

April 10, 2023

Inflation Reduction Act rules that limit who can claim $7,500 in federal EV tax credits go into effect April 18.
Consumers can opt for a used EV to gain a smaller, but still significant, tax credit.
Another options is to lease a new EV, but you’ll have to check with the carmaker if they’ll allow it.

It’s about to get a little harder to claim the full $7,500 federal EV tax credits when buying a new electric vehicle. The Inflation Reduction Act had specified some rules on what vehicles would qualify. That includes final assembly of the car taking place in North America, as well as the sourcing of EV battery components and critical minerals. These rules officially kick in on April 18, with the latter phasing in over a few years.

As a result, the current list of cars that qualify for the $7,500 credit will shrink. We can expect a smaller list of qualifying cars until manufacturers are able to meet the new battery rules. The IRS will update the list of qualifying EVs on April 17. At that time, the cars that currently qualify for a tax break may have a smaller tax credit or none at all, even if only temporarily. Meanwhile, carmakers are starting to move some factories to North America to chase those tax credits.

But don’t despair – there are still ways to get a tax break on an EV purchase. Tax experts suggest that those willing to buy a used EV or lease a new one may qualify for some different tax breaks.

$4,000 Credit for Used EVs

The Inflation Reduction Act did also create federal EV tax credits for people who want to buy used electric or fuel-cell vehicles. The tax break for used cars is worth $4,000 or 30% of the sale price, whichever amount is lower. This “previously owned clean vehicles credit” doesn’t carry any of the manufacturing rules that are tied to new EVs.

To qualify, you have to purchase the car from a licensed dealer, the car’s model year must be at least two years old, and the sale price must be $25,000 or less. It’s only available to individuals, not businesses.

In addition, buyers are ineligible for a credit if their annual income exceeds certain thresholds:

$75,000 for single-person households.
$112,600 for head of household.
$150,000 for married couples who file their taxes jointly.

These income limits are about half of the thresholds that apply to the $7,500 tax credit for new vehicles.

$7,500 for Leased EVs

Consumers also should be able to get federal EV tax credits worth up to $7,500 for leasing new electric passenger vehicles. This tax benefit doesn’t carry the manufacturing requirements we’ll be seeing on new cars. Carmakers have affiliate leasing or financing affiliates that will buy EVs for commercial purposes and then lease those cars to consumers — at which point they may pass on the associated tax break. But you’ll need to check, because not all manufacturers may want to pass that on that break to the buyer.

In conclusion, the new IRS rules may make it a bit harder to claim the full $7,500 federal tax credit. However, tax breaks for used cars and leased vehicles may be an easier way to maximize your savings. So don’t give up on your dream of driving an EV just yet!