Three ways to make the most of EV tax credits

From taxes to insurance and maintenance, electric vehicles operate differently than their gas relatives. Much of the industry is still grappling with these differences, from manufacturers to retailers and auto insurers. However, with a potential $7,500 on the table, there’s a lot of incentive for new car buyers to learn the EV tax credit rules.

The good news is that you no longer have to wait until tax season to get your tax credit. You can request the money from the dealer when you buy your EV. Let’s look at ways to get the most out of tax credits.

1. Understand the income restrictions

To qualify for the tax credit, you must plan to use the car yourself and drive it on U.S. roads. Income-wise, the IRS says your modified adjusted gross income must be less than:

  • $300,000 for married couples filing jointly
  • $225,000 for heads of household
  • $150,000 for all other filers

Takeaways for making the most of EV tax credits

If your income is above the threshold, there is some wiggle room: you can choose whether to use your income from this year or the year before. As long as you earned less than the limit in either year, you are still eligible.

Another possible loophole? Maybe you can lease instead of buying. Keep in mind that leasing is often under fire from financial experts. This is because when you take out a car loan to buy a car, you ultimately become the owner of the vehicle. If you lease, you pay monthly to rent the car and must return it at the end of the lease period.

Leasing an electric car may make sense for some people. As for EV tax credits, the income restrictions do not apply to leasing. Secondly, there is more flexibility in which brands and models are eligible. According to Electrek, many leasing companies will pass on some or all of the savings to consumers. Furthermore, given the rapid development of EV technology, leasing an electric car for a few years can also mean that you are not tied to outdated technology.

That said, car insurance can also cost more for a leased car, and you may face cancellation fees if you want to end the lease early. Look at the costs and investigate the pros and cons of leasing.

2. The EV tax credit may be more refundable than you think

Unlike a refundable tax credit, where you get money back, the EV is non-refundable.

Once your taxes go to zero, you can’t continue. Let’s say you qualify for $7,500 in EV tax credits and owe $6,500 in taxes. You won’t get the extra $1,000 back.

In theory, this makes it harder for middle- to low-income taxpayers to qualify for the full credit. However, the IRS guidelines are not clear-cut.

Takeaways for making the most of EV tax credits

Contact a tax advisor as you can still claim the full credit. When the IRS released updated information about the tax credit last October, it made an important change. Suppose you apply for the tax credit from the dealer when you purchase the vehicle. You then notice that your tax bill is not $7,500. Under the updated rules, no one can come back and ask you for the difference. On paper it is a non-refundable credit, but that is not how it works in practice.

It is also worth considering a second-hand electric vehicle. These can qualify for up to $4,000 in tax credits, and prices have dropped significantly in recent years.

3. Know which cars qualify

Bear with me, this is where things get a little complicated. To qualify for this discount, a car must first meet basic battery life, weight and cost requirements and be assembled in North America. In addition, there will be additional rules on critical minerals and battery components.

The Department of Energy says this is how the two halves of the $7,500 credit work:

  • Critical Minerals: To qualify for a $3,750 tax credit, 50% of critical minerals must be mined or processed in the U.S. or a country with a free trade agreement.
  • Battery Components: To qualify for a $3,750 tax credit, 60% of the components in the battery must be manufactured or assembled in North America.

The percentages will increase every year as the government wants the credit to stimulate electric vehicle production in the US

Takeaways for making the most of EV tax credits

To see exactly which cars qualify, visit the Fuel Economy website. You may be surprised to learn that this is based on the individual vehicle. According to Consumer ReportsEven within the same make and model, there may be cars that qualify while others do not. As for price, the Manufacturer’s Suggested Retail Price (MSRP) should be less than $80,000 for vans, SUVs, and pickup trucks, and $55,000 for other vehicles.

You can enter the vehicle identification number (VIN) on the Department of Transportation website to ensure the car you want qualifies. You will need that number when you fill out the IRS form to claim your credit.

In short

Making the most of the EV tax credits may require a fair amount of research, both in terms of your tax situation and the car you buy. But that $7,500 can go a long way toward making an electric vehicle more affordable.

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