Navigating the new electric-vehicle tax credits to get more money back – EQ Mag Pro
The Inflation Reduction Act has income limits, vehicle price caps and a host of other variations that affect the cost of an EV
For electric-vehicle shoppers, the decision to buy now or wait a few months could cost thousands of dollars.
Last week, President Biden signed the Inflation Reduction Act, a broad climate, healthcare and tax law. As part of the pact, the rules as to which vehicles qualify for an electric-vehicle tax credit have changed, including a new rule that requires final assembly in North America for purchases on or after Aug. 16.
More changes come as of Jan. 1, when vehicle price limits and household-income limits kick in. For new EVs, no credit will be allowed for an individual taxpayer whose modified adjusted gross income is more than $150,000, $225,000 for head-of-household filers and $300,000 for joint filers. For used EVs, no credit will be allowed for an individual taxpayer whose MAGI is over $75,000, $112,500 for head of household filers and $150,000 for joint filers.
Taxpayers who are well over the new income limits need to act before year-end to get the credits. For those near the income limits, they can position themselves to be eligible for the credits in 2023 with some financial-planning steps.
“The new law drives a lot of investment in EVs, and in the long run it’s going to play a tremendous role in shifting our economy to electrification, but the consumer tax credits are awkward and in the short term confusing to people,” says Joel Levin, executive director of the nonprofit EV advocacy group Plug In America, who drives a 2015 Nissan Leaf.
Here’s a guide through the new hurdles to claiming the credits.
What are the credits?
The maximum tax credit in the new law is the same as the old law. EV buyers can get a credit of as much as $7,500 for new electric vehicles through 2032. And starting in January, there is a new tax credit of up to $4,000 or 30% of the sales price, whichever is less, for used EVs, also through 2032.
Purchases between Aug. 16 and year-end
Shoppers who buy and take possession of an EV in this period are limited to vehicles with final assembly in North America. The Energy Department has already put together a list of Model Year 2022 and 2023 vehicles that likely meet the requirement—likely because some models are built in multiple locations.
To check whether a specific vehicle meets the final assembly rule, buyers can enter the make and model year and VIN into the National Highway Traffic Safety Administration’s VIN Decoder, and the decoder spits out vehicle details including the place of manufacture.
Note that manufacturer caps still apply for this year. This means that no credits are available for manufacturers such as Tesla that have already reached 200,000 in EV sales.
Transition rule for purchases before Aug. 16
EV buyers who entered into a binding contract to buy a new EV in 2022 before the Aug. 16 effective date can still claim the credit based on the old rules, even if they take possession of the vehicle later. This means an electric Mini Cooper manufactured in England, bought in the spring and expected to be delivered in September, for example, still qualifies for a tax credit.
Purchases in 2023 and later
The manufacturer caps are lifted as of 2023. But price caps and income limits kick in, and new rules around battery components will limit the number of vehicles that qualify. Watch for another DOE list.
For new EVs, the price caps are $80,000 for pickups, SUVs and vans and $55,000 for other vehicles. Used EVs can’t cost more than $25,000, must be at least two years old, and must be bought at a dealer.
Income-limit workarounds
Congress designed the income limits as a cliff, meaning once you are over the amount, the credit is gone, says Mark Luscombe, a federal tax analyst at Wolters Kluwer Tax & Accounting. The limits aren’t adjusted for inflation either, he adds.
But there is a potential workaround.
“For taxpayers who are hovering over the limits, it’s not the end of the road. They may be able to benefit from the tax credit with the right tax planning,” says Laura Caiafa, an enrolled agent in Hamden, Conn. A powerful way to lower adjusted gross income is by boosting contributions to a pretax 401(k) retirement account or a health-savings account, she says.
Another way to lower AGI is to max out workplace dependent-care benefits and commuter benefits, says Mr. Luscombe.
State tax incentives
Some states such as California have income limits on who can claim state tax incentives for EVs, but many states offer them to everyone. Plug In America lets shoppers enter their ZIP Code online to search for state and local tax breaks. Ms. Caiafa has a New Jersey client who bought a Tesla Model 3 last year and didn’t get the federal tax credit but got a $2,000 state rebate.
Source: wsj
