In August 2022, the Inflation Reduction Act was passed, bringing significant changes to the existing federal EV tax credit. The credit was split into two parts: battery materials and battery components, both of which must be sourced from North America or a country approved by the Treasury Department. Additionally, the act required that the final assembly of the vehicle take place in North America.
For individuals purchasing or leasing an electric car, there were separate rules to follow. These rules included meeting income restrictions and owing enough in federal taxes to qualify for the maximum EV tax credit. If a person’s tax liability for the year was $2000, then that was the maximum credit they could receive.
However, those with no tax liability received no benefit from the credit, which caused those who needed it the most to be excluded. Furthermore, unlike most tax credits, any unused portion of the EV tax credit could not be carried over to the next tax year.
The original federal EV tax credit had several issues. It was difficult for customers to determine where electric car companies sourced their battery materials and components from. Additionally, customers who purchased an EV in January had to wait until the following year to benefit from the credit when they filed their federal tax return. This confusion often led potential buyers to delay their purchasing decisions until they had a clearer understanding of the situation.
Point of Sale Rebates for EV Buyers
Starting from January 1, 2024, new rules issued by the Treasury Department will transform the federal EV tax credit into a point of sale rebate. This new system, published on October 6, 2023, brings good news for EV buyers.
According to the Inflation Reduction Act, consumers can now transfer their new clean vehicle credit of up to $7,500 and their previously owned clean vehicle credit of up to $4,000 to a car dealer at the point of sale, effectively lowering the vehicle’s purchase price. This eliminates the need to wait until the following year to claim the credit on their tax return.
The burden of administration falls heavily on dealers, who will report sales directly to the IRS and receive reimbursement for the amount of the credit within 72 hours. One of the most significant changes will allow eligible consumers to transfer the full value of the new or previously owned vehicle credit regardless of their individual tax liability.
Another advantage for buyers is that the credit is now applied at the time of sale, reducing the amount financed and lowering monthly payments. This is particularly beneficial for low-income shoppers who typically face higher interest rates on loans.
The IRS emphasizes the importance of providing clarity and certainty to buyers, stating that dealers will be required to provide necessary disclosures and written confirmation to buyers regarding the vehicle’s eligibility for the credit and the credit amount.
Income and Price Limits
The price and income limits established by the Inflation Reduction Act still apply under the new guidance. Sedans and wagons are limited to a sales price of $55,000, while SUVs and light trucks are limited to $80,000. The income limits for a new vehicle are $150,000 adjusted gross income for an individual, $225,000 for a head of household, and $300,000 for a married couple filing jointly or a surviving spouse.
For used cars, the income limits are $75,000 for an individual, $112,500 for a head of household, and $150,000 for a married couple filing jointly or a surviving spouse. The maximum sale price of a used car must be less than $25,000, and the credit is limited to 30% of the sale price or $4,000, whichever is lower.
Benefits for Low Wage Workers
The new system allows low-wage workers with little to no tax liability to take advantage of the qualifying used EV federal tax credit. They can deduct the full $4,000 from the price of a qualifying used LEAF or Chevy Bolt at the point of sale. Previously, these customers did not receive any credit.
It’s important to note that a used EV can only qualify for the credit once. Dealers are responsible for informing customers about a used EV’s eligibility, which can be easily done by accessing a government website and submitting the VIN number.
However, it is essential for buyers to be aware that the used EV must be for personal use and not for business purposes. Depreciation is not allowed on cars that have received the used EV tax credit.
Administrative Burden and Dealers
Dealers now carry a significant administrative burden under the new regulations. While Tesla automobiles are now eligible for the EV tax credit, it is unclear whether Tesla qualifies as a “dealer” according to the IRS. Dealers must not be delinquent in their own taxes to participate in the rebate program.
It is crucial for customers to be cautious of dealers who attempt to charge extra documentation fees for paperwork that is supposed to be included. If confronted with this situation, customers have the right to walk away. It is likely that the dealer will quickly correct any mistakes to prevent the loss of a sale.
