January 18, 2024
Electric vehicles (EV) have been taking the world by storm for the last several years, due in no small part to government subsidies and credits to help people invest in the new technology. Now, though, taxpayers should be aware of the major changes coming before they consider buying an EV.
When Congress passed the Inflation Reduction Act in 2022, it amended the Qualified Plug-In Electric Drive Motor Vehicle Credit (now known as the Clean Vehicle Credit) to create widespread changes for the 2024 calendar year. That amendment, called the 2024 Electric Vehicle Tax Credit, eliminates manufacturer sales caps, the ability to apply the credit to both EVs and fuel cell electric vehicles and more. Perhaps most importantly, it allows for a potentially significant tax savings for qualified buyers. The problem, however, is that getting the credit is somewhat complicated.
The 2024 Electric Vehicle Tax Credit allows for buyers to realize a tax credit on the purchase of both new and used EVs. The credit is only allowed for new sedans and passenger cars priced at $55,000 and lower. For new vans, SUVs, and pickup trucks, the maximum allowed MSRP on the vehicle is $80,000. For used EVs, the credit only applies on cars priced at $25,000 or less.
Additionally, the vehicle applying for the credit must weigh less than 14,000 pounds and for used cars, specifically, the EV must be at least two years old.
In order for a vehicle to qualify for the tax credit, 50% of the assembly and manufacturing of the car’s battery components must have been completed in North America. Similarly, 40% of the battery’s critical minerals must have been sourced from North America. If the vehicle’s battery only meets one of the criteria, the credit amount is reduced to $3,750.
This caveat is part of a broader effort by the U.S. government to limit product sourcing from so-called “countries of concern.” The act states that starting in 2024, battery parts from a country of concern are banned and starting in 2025, critical minerals may not be sourced from a country of concern.
In addition to vehicle requirements, the new EV tax credits are only applicable if taxpayers meet income thresholds.
For 2024, the new car EV tax credit is only available to single taxpayers with a modified adjusted gross income of $150,000 or less. Heads of household are allowed a $225,000 threshold, while married taxpayers who file jointly can qualify for the credit with $300,000 or less in modified AGI. Married taxpayers who file separately are limited to $150,000.
Those buying a used EV and who file single can only qualify with $75,000 or less in modified AGI. The same holds true for married taxpayers filing separately. Heads of household must make $112,500 or less and married couples filing jointly must have a modified AGI of $150,000 or less to qualify.
For 2024, taxpayers can claim $7,500 in a tax credit for buying a new EV. For used vehicles, that tax credit is 30% of the sales price, up to a maximum of $4,000, and it may only be used once every three years.
Interestingly, car dealers will play a potentially important role in helping taxpayers get the EV tax credit.
Starting on January 1, taxpayers will have the option to transfer their tax credit to the dealer. If the taxpayer and vehicle meet all of the aforementioned criteria, buyers can opt to have their tax credit applied to the purchase of their vehicle, effectively dropping the price on a new car by $7,500 and up to $4,000 on a used car. By doing so, taxpayers give up their right to a separate tax credit and instead, dealers will be able to claim the credit themselves.
Additionally, the credit can be applied to leases and not just outright purchases, giving taxpayers the ability to significantly reduce the car’s selling price and therefore, their lease payments.
If taxpayers decide not to transfer their tax credit to a dealer, they must file form 8936 with their tax return to claim the credit. Taxpayers will also need to share their car’s vehicle identification number (VIN) to verify that the vehicle matches the criteria. Be aware, however, that the credit cannot exceed what a taxpayer owes and any excess credit cannot be used in subsequent tax years.
Attached is a chart (created by the Tax Foundation) indicating the EV tax credit by state.
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