The new EV credits: help or hype?
Federal incentives will be great for some buyers, but less so for others
As electric vehicles (EVs) have become more competitive with their standard fuel counterparts in terms of cost and performance, more Americans are taking a closer look at their EV options. To encourage adoption, the federal government has a new set of tax credits for those who purchase new or used electric vehicles, but whether it works for you depends on how the fine print applies to your situation. IMU breaks it down simply.
By the numbers
For purchases made from 2023 until 2032, the federal tax credit for new electric vehicles will be up to $7,500 for personal vehicles and up to $40,000 for certain commercial vehicles. This is great, but the credit begins to phase out for each manufacturer once they have sold 200,000 electric vehicles. For example, Tesla has already sold enough units to be phased out of the tax credit program, while Ford and General Motors still have available credits for their EV models.
There is also a tax credit available for used EVs. This credit is worth up to $4,000 and is available for used electric vehicles that are at least two years old but less than four years old. The final credit amount is determined based on the vehicle's battery capacity and the year it was made.
The fine print
The incentives, while attractive, come with conditions. For example, individuals may not meet the personal financial requirements to qualify for the credit. If purchasing a new vehicle, your modified adjusted gross income (AGI) may not exceed $300,000 for married couples filing jointly, $225,000 for heads of households, and $150,000 for all other filers. If purchasing a used electric vehicle, your modified AGI may not exceed $150,000 for married couples filing jointly or a surviving spouse, $112,500 for heads of households, and $75,000 for all other filers.
The caveats
Not all electric cars are eligible for the tax credit. To qualify, the vehicle must have a battery capacity of at least 7 kilowatt-hours (kWh) and be capable of being charged from an external source. This means that plug-in hybrids and electric vehicles with smaller batteries may not be eligible. Additionally, the vehicle’s weight cannot exceed 14,000 pounds. If purchasing a new EV, there are price limits - $80,000 for vans, sport utility vehicles, and pickup trucks; and $55,000 for cars and other vehicles.
There are also somewhat confusing conditions around USA-based manufacturing - especially for battery components - and “final assembly,” which must take place in North America.
PRO TIP: It's important to note that a tax credit is not a rebate, meaning that it doesn't provide an immediate reduction in the purchase price of the car. Instead, the credit is applied when you file your federal income tax return. So the credit will lower your tax bill, and if it exceeds the amount of taxes owed the difference will be refunded to you.
The bottom line
Overall, the federal tax credits for buying new or used electric cars can provide a significant financial benefit to those looking to make the switch. While the credit for new electric cars will begin to phase out for certain manufacturers, there are still available credits for many popular EV models.
As always, it's important to do your research and read the fine print. And it’s never a bad idea to speak with a tax professional to fully understand the implications of the credit on your individual tax situation.
To learn more, visit fueleconomy.gov and click the “Save Money & Fuel” tab. The IRS website has all the specifics in granular detail: visit IRS.gov and search “clean vehicle credits.”