From cash on the hood, to EV tax credits, and to HOV lane access, governments are motivated to get you into an EV. Are you getting your share of those incentives? In this column, we’ll address the nuances of IRS Code 30C, which describes the US Federal $7,500 tax credit and is also the source of much confusion. Furthermore, we will discuss other types of incentives that may be available to anyone hoping to get into an EV.
The Nitty Gritty Details of EV Incentives
There are too many state and local incentives to review here, and even if I tried, I’d surely miss a few. Luckily, plenty of government and industry websites have staff that track this for you. You just need to know where to look!
Electric For All has an easy-to-use page where you can simply type in your zip code to find available incentives based on your area. I recommend starting here. For example, my area has the US Federal plus state incentives, but we also have a regional Air District incentive, plus the local utility has yet another incentive. If you qualify, the sum total of all the EV incentives available can really be staggering for either a new or used car. And sometimes even a charging station.
Diving deeper, the US Government also maintains a website that explains all the different kinds of incentives available, but this is limited to those managed by the federal government. This website, maintained by the US Department of Energy, is very broad in scope, and it is easy to get bogged down with too much information. Still, it is definitely the authority on the topic of what incentives are available and who qualifies.
Fortunately, most (all?) state and local incentives are easy to understand. You live in the right jurisdiction, you meet income requirements (if any), and you buy a qualifying car. Simple.
Leave it to the IRS to take a great idea and make it difficult to understand.
IRS Section 30C
I am not an accountant, and I have never played one on TV. But I am an adult who can read and have been paying taxes in the US for almost 50 years now. Also, I had my CPA read this, and she said it was good to go as long as I said that you should have a qualified tax professional review your individual circumstances.
Prior to August 16, 2022, obtaining the $7,500 Federal Tax Credit for an EV was pretty straightforward. But everything changed once President Biden signed the Inflation Reduction Act into law. Long-term, the changes are probably for the better, but the IRA does make buying an EV and getting the $7,500 tax credit far from certain for many would-be car buyers. If you want the credit, you need to do your homework to ensure that you will get it first; otherwise, you could be in for about $7,500 worth of disappointment.
According to the IRS, the Inflation Reduction Act is a 10-year work in progress, and they (the IRS) have not yet completed that work. What this means to you, dear reader, is that anything I write in 2023 is subject to change. Nevertheless, there are some things we can be 100% certain of. Unless, of course, Congress rewrites or overturns the Inflation Reduction Act.
There is a maximum Adjusted Gross Income test now, generally defined as $300k for couples filing jointly and $150k for single filers. But there are other disqualifying details, so, you’d best check. If you make more than this amount, no soup for you.
There are a number of stipulations that can affect a vehicle’s eligibility. In order to qualify, a vehicle:
- Must be new (used vehicles can qualify for a used vehicle credit, however)
- Must cost less than $80,000 for SUVs, vans, and trucks
- Must cost less than $50,000 for other vehicles
- Must weigh less than 14,000 pounds
- Must be made by a qualifying manufacturer
- Must have a battery larger than 7 kWh
- Must undergo final assembly in North America
- Must meet critical mineral and battery component requirements, which will change every year for the next few years
In short, there are a whole lot of ways that a shiny new EV won’t qualify for that shiny $7,500 EV tax credit, and it will change every year for the foreseeable future. And depending on other factors, a car may only qualify for partial credit. Fortunately, there is a quick and easy way to determine if a specific car is eligible and if it gets full or partial credit by checking if it is on the list at fueleconomy.gov. Remember that the MSRP limit applies to factory-installed options. The list at fueleconomy.gov is the definitive list of qualifying vehicles. It doesn’t matter if your friend told you that vehicle x qualifies, or if the dealer said it qualifies, or even if the car does actually qualify but isn’t on this list. The manufacturer has the responsibility to certify the car’s qualification with the IRS. That’s what earns a particular EV the right to be on the list. Remember, if your car qualifies for the credit at the base price, but factory-installed options put you over the bar, you’re frankly out of luck.
What Is a Tax Credit, Anyway?
My experience in EV-related social media groups leads me to conclude that there is a lot of misunderstanding about tax credits, and even about taxes in general. A tax credit isn’t a deduction, nor does the credit have anything to do with the withholdings your employer deducts from your paycheck.
The simplest way to think of a tax credit is to think of it as a coupon to get a certain amount of money off your tax bill – in the case of the EV credit, brought to you by Section 30C of the IRS code, that amount is $7,500.
If, at the end of the year, your tax bill is $10,000, you’ll get $7,500 off for buying a qualified EV and will only owe the IRS $2,500. Nifty, huh?
But what if your tax bill was only $5,000? How do you claim your $7,500 refund? You don’t, because it isn’t a refund. You get $5,000 off your tax bill, so in this example, your tax bill is reduced to zero, and the difference ($2,500) is forfeited because you didn’t qualify for the full EV tax credit.
To state it more monosyllabically, your tax liability (bill) is not the amount withheld from your paycheck. If you filed your taxes on Form 1040 in 2022, your tax liability is the amount on line 18. To claim the credit, use Form 8936.
Should I Wait Until 2024?
The good-ish news is that starting in 2024, the EV tax credit will be applied as a point-of-sale deduction. You heard correctly. Starting in 2024, the IRS will let you, the consumer, assign the tax credit to the dealer, and the dealer can apply that at the point of sale. Note that all the other qualifications, like MSRP caps and final assembly in North America, still apply.
What remains unclear is whether this will still require a consumer to have a $7,500 tax liability to claim the credit and assign it to a dealer. I’ve seen this reported as no tax liability required, but no official information on the IRS website details how that transfer will take place, nor how it will be enforced if income caps are still in place. In short, things may get easier in 2024, or they may get more confusing. I’ll update this column as soon as I see something about how the credit will be applied in the 2024 tax year.
Next week, we will discuss the gateway drug to EVs – the plug-in hybrid.