How do tax credits for electric cars work? When to buy.
Electric vehicles are going mainstream in a big way. Last year they accounted for an impressive 7.1% of all new cars purchased. Look for these numbers to take another leap forward in the future, as $7,500 in tax credits kick in for some electric cars and trucks.
It’s part of the Inflation Reduction Act, a landmark bill passed in August 2022 that provides financial incentives for Americans to buy electric cars and appliances as the nation moves away from fossil fuels. There are also incentives for upgrading appliances and making the home green.
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This could go a long way toward helping the US transition to carbon-free energy. Transportation was the largest source of US greenhouse gas emissions in 2022, according to the Sustainable Energy in America 2023 Factbook.
Although the law itself was passed eight months ago, many of the details are still being worked out, so it is not easy to find out whether you or the car you want qualify, and much remains to be done. You must carefully check your personal qualification and the qualification of the car ̵[ads1]1; and the latter can change quickly.
The tax credit may become more difficult to access soon, when battery source claims come in, possibly limiting which cars qualify. But things should get easier in 2024 when you can transfer the tax credit to your dealer to get an upfront discount.
Here’s what you need to know for now about tax credits for electric vehicles:
The bottom line: When should you buy an electric car?
- Almost ready to buy? Do it soon – like now. The number of vehicles that qualify may shrink in 2023, for complex reasons you’ll learn about below. If you’re close to buying, move quickly to get the most options and best chance to save.
- Still researching? Take your time – 2024 may be a better time to buy. The rules will be finalized in the coming months and retailers may be able to give you discounts in advance next year. Overall, getting these discounts should be a smoother experience if you can wait.
Who qualifies for tax credits for electric cars? Which vehicles qualify?
The law gives qualified vehicle buyers as much as $7,500 in tax credits for the purchase of a new electric vehicle (EV) or plug-in hybrid and up to $4,000 for a used one. However, there are income limits and price caps.
Income eligibility limits:
- Households filing jointly earn $300,000 or less.
- Heads of household earn $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 as non-refundable tax credits. This means that you cannot get more money back in the tax rebate than you actually owe in tax.
Say you buy a Chevy Bolt for $27,000. If your household pays at least $7,500 in taxes to the federal government and you otherwise qualify for the credit, your tax bill will be reduced by that much.
If you only owe $3,000 in taxes, you might 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, Americans with an adjusted gross income between $50,000 and $75,000 paid $4,567 in taxes in 2020, according to the IRS. Those earning between $75,000 and $100,000 paid $7,363.
This means middle- and higher-income families are most likely to benefit from the tax credits because of how the law was written, said Sage Briscoe, federal senior policy manager for implementation with Rewiring America, an electrification non-profit.
“Non-refundable tax credits favor those with larger tax bills and they tend to be higher income earners,” she said.
A new battery rule could change things
The IRA contains language requiring that the battery components used in an electric vehicle be manufactured or assembled in North America and that critical minerals be sourced from the United States or a country with which the United States has a free trade agreement, or recycled in North America, but it was not fully clarified. The requirements are also becoming stricter over time because Congress wanted to encourage automakers to move EV battery production to the United States.
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Sometime soon – perhaps at the end of March – the tax authorities will issue new regulations describing how this will work. These are some of the most complex parts of the IRA pure vehicle credit.
When the regulation goes into effect, “many vehicles that are currently eligible for the full $7,500 credit will likely only be eligible for half the credit,” said Chris Harto, Consumer Reports’ senior energy policy analyst.
To avoid this, you must buy – and receive – an electric car before the rules come out.
“If they say you get it in May, you might be stuck,” Briscoe said.
Tax deductions for electric cars will change again in 2024
Starting in 2024, buyers can also transfer the tax credit for an electric car to the dealer, giving them a $7,500 upfront rebate.
How this will play out is not yet known.
“It’s unclear how the dealer will know you qualify for the full credit,” Luscombe said. “Maybe that’s why it’s delayed for a year so the IRS can figure it out.”
It’s also possible that some EV manufacturers whose vehicles don’t qualify because they’re too expensive may offer to match the tax credit, so definitely check their websites.
Get up to $1,000 in rebates by installing an electric car charger
When you have an electric car, you may want to have an electric car charger at home. The IRA renews a tax credit that covers 30% percent of the installation cost, up to $1,000.
As written, the law includes geographic restrictions on where the credit can be used to encourage the installation of public chargers 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’s tax credits surrounding electric cars are so complex that consumers should be careful, said Keith Barry, an auto writer with Consumer Reports.
“You should always double-check the dealer’s math,” he said. “It doesn’t mean they are doing anything malicious – buying a car is a very complex process. Car salesmen are not accountants.”
Consumer Reports, long popular with car buyers, has a tool for understanding EV incentives and tax credits.
Rewiring America also offers a thorough online calculator for all IRA tax credits and rebates.
