The full value of the $7,500 electric vehicle tax credit may be hard to come by

Tomekbududodomek | Moment | fake images

the historic climate legislation President Joe Biden signed in August and offered a federal tax break, worth up to $7,500, to households buying new electric vehicles.

But it can be difficult for consumers to get the full value of the tax credit, at least initially.

That’s largely due to the structure of clean vehicle credit and certain requirements for consumers and automakers. Those obstacles, however, are about to disappear in the long term, experts said.

The ‘bummer’ tax credit: It’s non-refundable

The legislation, called the Inflation Reduction Act, made the tax credit “nonrefundable.”

That means consumers can only get the full financial benefit if they have a federal tax liability of at least $7,500. A nonrefundable credit offsets a consumer’s federal tax bill, but any remaining value is forfeited.

Let’s say a consumer buys an electric vehicle today. Filing his 2022 tax return, the person discovers that he owes $5,000 in federal taxes. This person would not get the full $7,500 tax credit; he could claim $5,000 and reduce his tax bill to zero. But the remaining $2,500 would be lost. In other words, those funds would not be given to the consumer in a tax refund.

Also, unlike other tax credits in the bill, such as the “residential clean energy” credit for home solar panels and other installations — any unused value is not carried over to future tax years to offset a future tax bill.

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“That’s a bit of a bummer” with credit, said Dan Herron, a certified public accountant and certified financial planner based in San Luis Obispo, California.

Typically, high-income consumers would likely benefit more from the full value of the credit compared to those with more modest incomes, since they typically have higher tax bills, Herron said. But the credit comes with some additional restrictions, like an income limit, explained in more detail below, that will restrict how many of those households can benefit.

Meanwhile, lower- and middle-income buyers typically have smaller tax bills, which means they’re more likely to miss the full credit, Herron said.

States, municipalities, and utility companies may also offer financial incentives for the purchase of electric vehicles.

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“If you can reap some profits or have additional income that you can reach in 2022, maybe I’ll consider it,” Herron said.

Workers can also adjust the tax withholding on their paychecks, choosing to withhold less and thereby increasing the taxes they owe.

However, Herron does not recommend this route due to possible unknowns. For example, an unexpected bonus during the year could mean a higher-than-expected annual tax bill, depending on the withholding adjustment.

Parameters that can reduce the credit

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Aside from the tax credit structure, the Reduce Inflation Act places requirements around new clean vehicles that may limit the value of your tax break.

As of August 16, when Biden signed the Inflation Reduction Act, the final assembly of the car must occur in North America to qualify for a tax break. The United States Department of Energy has a ready of vehicles that meet this standard.

The additional rules will take effect in 2023.

First of all, there are income caps. A tax credit is not available to single people with modified adjusted gross income of $150,000. The cap is higher for others: $225,000 for heads of households and $300,000 for married couples filing jointly. (The test applies to current or prior year income, whichever is less.)

And certain cars may not qualify based on price. Sedans with a retail price of more than $55,000 are not eligible, nor are trucks, SUVs or vans over $80,000.

There is a lot of uncertainty.

joel levin

CEO of Plug In America

Two other rules apply to manufacturing: one involves sourcing requirements for critical automotive battery minerals; the second requires that a portion of the battery components be manufactured and assembled in North America. Consumers lose half the value of the tax credit, up to $3,750, if one of those requirements is not met; they would lose the entire $7,500 for failing to comply with both.

It’s unclear which electric vehicles will meet these standards and qualify for a tax credit next year. There is a chance that none will qualify right away, according to to the Alliance for Automotive Innovation.

“There’s a lot of uncertainty,” said Joel Levin, CEO of Plug In America.

“If you need a car, I think it’s risky to delay the purchase in the hope of getting credit,” he added. “It may not work or it may be a couple of years before it becomes eligible.”

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Another consideration: Consumers who buy a Tesla or General Motors model before the stricter rules take effect on January 1 are not eligible for a tax break based on past parameters on sales limits that expire at the end of the year. year.

There is also another option: buy a used electric vehicle instead of a new one.

The Reducing Inflation Act created a “previously owned clean vehicle credit” worth up to $4,000 starting in 2023. The tax break comes with some restrictions (such as a $25,000 cap on the car’s sticker price and lower income limits for consumers), but do not meet the manufacturing and assembly requirements for new cars.

A more consumer friendly option

Consumers willing to wait until 2024 to buy a new or used car, and get the associated tax break, will have the most consumer-friendly option available to them, experts said.

This is because the climate law will allow a buyer to transfer their tax credit to the car dealer. A dealer, who must register with the US Department of the Treasury, would receive an advance payment of the consumer tax credit from the federal government.

As a result, consumers will likely be able to receive the full tax credit at the car dealer’s point of sale as a discount off the sticker price or a reduction in the vehicle’s down payment, Levin said. And they’ll get that discount even if they don’t have a tax liability, he added.

“It makes credit much more valuable to people, especially people who are moderate-income and don’t have a lot of money in their pocket for a down payment,” Levin said.

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