The IRS released new guidance on the EV tax credit today, and the changes mean that starting next year, low- and middle-income buyers will be able to get the full $7,500 credit even if they don’t have enough tax liability.
The Inflation Reduction Act included big changes to the EV tax credit, and those changes were set to roll out over the course of the months and years after it passed.
One of those changes has to do with making the tax credit available upfront at the point of sale. This means that, instead of having to file for the credit on your taxes the year after you purchase an EV, you just get a cheaper car upfront.
One other issue with the tax credit was that it wasn’t available to customers who didn’t have enough tax liability to claim it. The credit is not “refundable” and can’t be rolled forward, so if you don’t make more than about $66,000 (absent other credits), you won’t have enough tax liability to reduce and therefore you leave some of the $7,500 on the table.
But the new changes announced today fix that, such that buyers of lower income levels will be able to get the full $7,500 credit, upfront at the point of sale.
The relevant part of the law is the new “transferability” provision that allows a buyer to transfer the EV tax credit to the dealership they are purchasing the car from. The dealer then passes the savings on to the buyer, and is reimbursed by the government with an advance payment of the tax credit.
It’s covered in the fact sheet the IRS released today, under Topic H, Q4
Q4: What if a buyer has insufficient tax liability to fully use a transferred credit? (added October 6, 2023)
A4. The amount of the credit that the electing taxpayer elects to transfer to the eligible entity may exceed the electing taxpayer’s regular tax liability for the taxable year in which the sale occurs, and the excess, if any, is not subject to recapture from the dealer or the buyer.
Here, “recapture” refers to the ability of the IRS to come seek you out if they decide that you’ve improperly filed for the credit. This question states that the credit is not subject to recapture, even if the buyer ends up having too little tax liability to otherwise benefit from it (and dealers don’t have to worry about it either, per Topic H, Q19).
This change does not remove the income cap present in the IRA law, which restricts the credit for taxpayers who make over $150,000 single/$225,000 head-of-household/$300,000 married. So high-income people still cannot claim the new credit, but low and middle-income people can.
The change goes into effect on January 1, 2024, so any EV purchased after that date from a registered car dealer will be able to take advantage of these transferability provisions.
While we already covered the tax credit changes this morning, I wanted to write this article to specifically address what has been a big sticking point with the credit ever since its original inception back in 2008. President Obama even mentioned it in a State of the Union and made it a policy goal of his to make the credit available at point of sale.
The way the credit was previously designed was regressive, meaning that higher-income people were more able to benefit from it than lower-income people. This is something that should generally be avoided when creating policy.
It also meant that buyers might have to finance the additional $7,500, paying more interest and higher monthly payments for the lifetime of the car. In short, it just made electric cars less attainable to lower-income people, which is a shame, since they’re the ones who could benefit most from cheaper running costs and cleaner air in lower-income communities that tend to be more polluted.
While lower-income buyers don’t typically buy new cars, it’s certainly conceivable that someone making around the national average income ($59,000 less than the approximately $66,000 required for $7,500 of tax liability) might be able to buy a new Nissan Leaf at $28,000 base MSRP or upcoming Volvo EX30 at $35,000. Or if they’re lucky, maybe they can snag a Chevy Bolt that’s still in inventory at the beginning of next year, despite that car’s upcoming discontinuation in December.
Some might even be able to stretch for the new lower-priced Model 3 at $39,000, assuming Tesla prices or tax credit availability don’t change by next year, which they probably will. Although we certainly do not recommend that anyone stretch beyond their means to buy a new car just because it’s a Tesla – be sure to think about how this purchase would affect your finances, and if you still can’t afford a new car, you can always go with used.
Which brings to mind that, for low-income customers, this change should also apply to the used electric vehicle credit as well. This is available in a lower amount ($4,000) and has additional limitations on the vehicle purchase price. (The used EV must be under $25,000, and income caps are lower than on the new car credit)
There are also myriad other reasons that a buyer might be in a situation where they temporarily have lower tax liability than usual, or have access to other credits or refunds that lower their liability in a particular tax year, and might have otherwise jeopardized their ability to take the full EV tax credit. This change gets around many of those situations and should make it much easier for everyone to get the credit.
This is why when I originally wrote about the IRA tax credit changes, I used the headline “Senate improves EV tax credit.” While some of the changes added complexity, especially in the intervening year and a half as certain provisions have rolled out, overall it means that more cars will get the credit (by removing the cap of 200,000 per manufacturer), and the credit will be much easier to attain for those who seek it due to these transferability provisions.
Between this and the ability to bypass most requirements by leasing, EV tax credit availability is better than it’s ever been, and that’s great news for consumers, for EV makers, and for the environment.