Last Updated on October 21, 2023 by SPN Editor
Starting January 2024, the Internal Revenue Service (IRS) of the US is introducing a significant change in the way the $7,500 federal EV tax credit is available to buyers.
The Treasury Department announced that dealers will now have the option to immediately apply the EV tax credit to the purchase of electric vehicles (EVs) or provide cash to the buyer, making it more accessible and convenient.
This update also extends to buyers utilizing the $4,000 credit for used EVs, bringing relief to a broader range of electric vehicle owners.
- Also Read: Electric Car Market in the United States
A Long-Awaited Change
The electric vehicle tax credit was established by Congress with the Inflation Reduction Act of 2022. However, until now, the IRS had only offered this credit via tax returns, resulting in a prolonged wait for those who purchased EVs early in the year. This change means that buyers will no longer need to wait for tax season to reap the benefits of the credit.
Buyers must still ensure they meet income eligibility requirements and adhere to specific rules, either for the prior or current year. Additionally, only certain EV models qualify for this credit, which remains a concern for potential buyers interested in vehicles not assembled in North America, like Toyota’s RAV4 and Prius Prime hybrids.
How It Works
Buyers will need to complete paperwork to transfer their EV tax credit to dealers. Dealers, in turn, will provide buyers with required disclosures, including written confirmation of the vehicle’s eligibility for the credit and the credit amount. The IRS commits to sending dealers advance payments within 72 hours. However, buyers must be prepared to reimburse the IRS if they are later found ineligible for the credit.
Dealer Handling and Buyer Concerns
Questions have arisen regarding how dealers will handle these EV tax credits fairly. Some buyers have expressed concerns about dealers potentially inflating the car’s price to compensate for the credit. These concerns emphasize the need for transparency and oversight as this new system is implemented.
Interestingly, this new system does not seem to exclude companies that sell EVs directly to customers, such as Tesla and Rivian, from taking advantage of the IRS’ updated approach. Whether such companies will participate in this new system remains to be seen.
Qualifications and Credit Amounts
To qualify for the federal EV tax credit, buyers must meet specific criteria, including using the vehicle primarily in the U.S. and adhering to income limitations. The credit amount varies depending on factors such as battery capacity and the date the vehicle is placed in service.
To be eligible for the EV tax credit, vehicles must have a battery capacity of at least 7 kilowatt hours, a gross vehicle weight rating of less than 14,000 pounds, and undergo final assembly in North America. Meeting critical mineral and battery component requirements is also essential for vehicles placed in service after April 18, 2023.
The vehicle’s manufacturer suggested retail price (MSRP) cannot exceed $80,000 for vans, SUVs, and pickup trucks, or $55,000 for other vehicle types.
Therefore, IRS’ decision to make the federal EV tax credit available instantly through dealers is a significant development for EV buyers, eliminating the wait for reimbursement and potentially spurring further adoption of electric vehicles.
FAQs on EV Tax credit
Q1: What is the $7,500 federal EV tax credit, and why is it important?
The $7,500 federal electric vehicle (EV) tax credit is a financial incentive provided by the U.S. government to encourage the purchase of electric vehicles. It’s important because it significantly reduces the cost of buying an electric car, making EVs more affordable for consumers.
Q2: What has changed with the IRS’ update regarding the tax credit?
Starting in January 2024, the IRS will make the $7,500 federal EV tax credit available instantly through dealers. This means that buyers no longer need to wait for tax season to benefit from the credit. Dealers have the option to either reduce the purchase price of the vehicle or provide cash to the buyer.
Q3: Does this update apply to all electric vehicles?
The update applies to buyers taking advantage of the $7,500 federal tax credit for new electric vehicles and the $4,000 credit for used EVs. However, not all EVs qualify for this credit. Eligibility depends on factors such as the vehicle’s battery capacity and where it’s assembled.
Q4: Are there any income restrictions for claiming the tax credit?
Yes, income restrictions apply. To qualify for the EV tax credit, your modified adjusted gross income (AGI) must not exceed certain thresholds:
- $300,000 for married couples filing jointly
- $225,000 for heads of households
- $150,000 for all other filers
Q5: How can buyers ensure they qualify for the EV tax credit?
Buyers must meet specific criteria, including using the EV primarily in the U.S. and adhering to income limitations. Additionally, the vehicle’s battery capacity and assembly location are important factors in determining eligibility.
Q6: What if a buyer is found ineligible for the tax credit after receiving it through a dealer?
If the IRS later determines that a buyer does not qualify for the tax credit, the buyer will be required to pay back the credited amount to the IRS.
Q7: Can buyers trust that dealers will handle the tax credit fairly?
While the IRS will send advance payments to dealers for the tax credit, concerns have been raised about the fairness of how dealers may handle these credits. Transparency and oversight are essential to ensure a fair process.
Q8: Can companies that sell EVs directly to customers participate in this new system?
There do not appear to be restrictions preventing companies that sell EVs directly to customers, like Tesla and Rivian, from taking advantage of the IRS’ new system. However, whether they will choose to participate remains uncertain.
Q9: What is the purpose of the IRS’ decision to make the tax credit available through dealers?
The IRS’ decision aims to streamline and expedite the process of applying the federal EV tax credit, making it more accessible to buyers and eliminating the wait associated with tax returns.
Q10: How does the tax credit benefit electric vehicle buyers?
The tax credit significantly reduces the cost of purchasing an electric vehicle, making EVs more competitively priced compared to traditional gasoline-powered cars. This financial incentive encourages the adoption of cleaner and more sustainable transportation options.