$7,500 EV Tax Credit: Use It or Lose It
Claiming the $7,500 tax credit for buying an EV (electric vehicle) or hybrid vehicle may not be as easy as you think. First, it’s a “use it or lose it credit” meaning if you do not have a federal tax liability of at least $7,500 in the year that you buy your electric vehicle, you cannot claim the full $7,500 credit and it does not carryforward to future tax years. Normally, most individuals and business owners adopt tax strategies to reduce their tax liability but this use it or lose it EV tax credit could cause some taxpayers to do the opposite, to intentionally create a larger federal tax liability, if they think their federal tax liability will be below the $7,500 credit threshold.
There are several other factors that you also have to consider to qualify for this EV tax credit which include:
New income limitations for claiming the credit
Limits on the purchase price of the car
The type of EV / hybrid vehicles that qualify for the credit
Inflation Reduction Act (August 2022) changes to the EV tax credit rules
Buying an EV in 2022 vs 2023+
Tax documents that you need to file with your tax return
State EV tax credits that may be available
Inflation Reduction Act Changes To EV Tax Credits
On August 16, 2022, the Inflation Reduction Act was signed into law, which changed the $7,500 EV Tax Credits that were previously available. The new law expanded and limited the EV tax credits depending on your income level, what type of EV car you want, and when you plan to buy the car. Most of the changes do not take place until 2023 and 2024, so depending on your financial situation it may be better to purchase an EV in 2022 or it may be beneficial to wait until 2023+.
$7,500 EV Tax Credit
If you purchase an electronic vehicle or hybrid that qualifies for the EV tax credit, you may be eligible to claim a tax credit of up to $7,500 in the tax year that you purchased the car. This is the government’s way of incentivizing consumers to buy electric vehicles. The Inflation Reduction Act also opened up a new $4,000 tax credit for used EVs.
New Income Limits for EV Tax Credits
Starting in 2023, your income (modified AGI) will need to be below the following thresholds to qualify for the federal EV tax credits on a new EV or hybrid:
Single Filers: $150,000
Married Filing Joint: $300,000
Single Head of Household: $225,000
There are lower income thresholds to be eligible for the used EV tax credit which is as follows:
Single Filers: $75,000
Married Filing Joint: $150,000
Single Head of Household: $112,500
Before the passage of the Income Reduction Act, there were no income limitations to claim the $7,500 Tax Credit. Taxpayers with incomes level above the new thresholds may have an incentive to purchase their new EV before December 31, 2022, before the income limitations take effect in 2023.
Restriction on EV Cars That Qualify
Not all EV or hybrid vehicles will qualify for the EV tax credit. The passage of the Inflation Reduction Act made several changes in this category.
Removal of the Manufacturers Cap
On the positive side, Tesla and GM cars will once again be eligible for the EV tax credit. Under the old EV tax credit rules, once a car manufacturer sold over 200,000 EVs, vehicles made by that manufacturer were no longer eligible for the $7,500 tax credit. The new legislation that just passed eliminated those caps making Tesla, GM, and Toyota vehicles once again eligible for the credit. The removal of the cap does not take place until January 1, 2023.
Purchase Price Limit
Adding restrictions, the Inflation Reduction Act introduced a cap on the purchase price of new EVs and hybrids that qualify for the $7,500 EV tax credit. The limit on the manufacturer’s suggested retail price is as follows:
Sedans: $55,000
SUV / Trucks / Vans: $80,000
If the MSRP is above those prices, the vehicle no longer qualified for the EV tax credit.
Assembly & Battery Requirements
Another change was made to the EV tax credit under the new legislation that will most likely limit the number of vehicles that are eligible for the credit. The new law introduced a final assembly and battery component requirement. First, to be eligible for the credit, the final assembly of the vehicle needs to take place in North America. Second, the battery used to power the vehicle must be made up of key materials and consist of components that are either manufactured or assembled in North America.
Leases Do Not Qualify
If you lease a car, that does not qualify toward the EV tax credit because you technically do not own the vehicle, the manufacturer does. You have to buy the vehicle to be eligible for the $7,500 EV tax credit.
Are You Eligible For The EV Tax Credit?
Bringing everything together, starting in 2023, to determine whether or not you will be eligible for the $7,500 EV Tax Credit, you will have to make sure that:
Your income is below the EV tax credit limits
The purchase price of the vehicle is below the EV tax credit limit
The vehicles assembly and battery components meet the new requirement
Once there is more clarification around the assembly and components piece of the new legislation there will undoubtedly be a website that lists all of the vehicles that are eligible for the $7,500 tax credit that you will be able to use to determine which vehicles qualify.
Timing of The Tax Credit
Under the current EV tax credit rule, you purchase the vehicle now, but you do not receive the tax credit until you file your taxes for that calendar year. Starting in 2024, the tax credit will be allowed to occur at the point of sale which is more favorable for consumers. Logistically, it would seem that an individual would assign the credit to the car dealer, and then the car dealer would receive an advance payment from the US Department of Treasury to apply the discount or potentially allow the car buyer to use the credit toward the down payment on the vehicle.
However, car buyers will have to be careful here. Since your eligibility for the tax credit is income based, if you apply for the credit in advance, but then your income for the year is over the MAGI threshold, you may owe that money back to the IRS when you file your taxes. It will be interesting to see how this is handled since the credits are being awarded in advance.
A Use It or Lose It Tax Credit
There are going to be some challenges with the new EV tax credit rule beyond limiting the number of people that qualify and the number of cars that qualify. The primary one is that the $7,500 EV federal tax credit is not a “refundable tax credit.” A refundable tax credit means if your total federal tax liability is less than the credit, the government gives you a refund of the remaining amount, so you receive the full amount as long as you qualify. The EV tax credit is still a “non-refundable tax credit” meaning if you do not have a federal tax liability of at least $7,500 in the year that you purchase the new EV vehicle, you may lose all or a portion of the $7,500 that you thought you were going to receive.
For example, let’s say you are a single tax filer, and you make $50,000 per year. If you just take the standard deduction, with no other tax deductions, your federal tax liability may be around $4,200 in 2023. You buy a new EV in 2023, you meet the income qualifications, and the vehicle meets all of the manufacturing qualifications, so you expect to receive $7,500 when you file your taxes for 2023. However, since your federal tax liability was only $4,200 and the EV tax credit is not refundable, you would only receive a tax credit of $4,200, not the full $7,500.
No EV Tax Credit Carryforward
With some tax deductions, there is something called tax carryforward, meaning if you do not use the tax deduction in the current tax year, you can “carry it forward” to be used in future tax years to offset future income. The EV tax credit does not allow carryforward, if you can’t use all of it in the year of the EV purchase, you lose it.
Intentionally Creating Federal Tax Liability
If you are in this scenario where you purchase an EV but you expect your federal tax liability to be below the full $7,500 credit threshold, you may have to do what I call “opposite tax planning”. Normally you are trying to find ways to reduce your tax bill, but in these cases, you are trying to find ways to increase your tax liability to get the maximum refund from the government. But how do you intentionally increase your tax liability? Here are a few ideas:
Stop or reduce the contributions being made to your pre-tax retirement accounts. When you make pretax contributions to retirement accounts it reduces your tax liability. But you have to be careful here, if your company offers an employer match, you could be leaving free money on the table, so you have to conduct some analysis here. In many cases, 401(k) / 403(b) allows either pre-tax or Roth contributions. If you are making pre-tax contributions, you may be able to just switch to Roth contributions, which are after-tax contributions, and still take advantage of the employer match.
Push more income into the current tax year. If you are a small business owner, you may want to push more income into the current tax year. If you are a W2 employee, you are expecting to receive a bonus payment, and you have a good working relationship with your employer, you may be able to request that they pay the bonus to you this year as opposed to the spring of next year.
Delay tax-deductible expenses into the following tax year. Again, if you are a small business owner and have control over when you realize expenses, you could push those into the following year. For W2 employees, if you have enough tax deductions to itemize, you may want to push some of the itemized deductions into the following tax year.
Delay getting married until the following tax year. Kidding but not kidding. Nothing says I love you like a full $7,500 tax credit. Use it toward the wedding. You may not qualify under the single file income limit but maybe you would qualify under the joint filer limit.
State EV Tax Credit
The $7,500 EV tax credit is a federal tax credit but some states also have EV tax credits in addition to the federal tax credit and those credits could have different criteria to qualify. It’s worth looking into before purchasing your new or used EV.
EV Tax Credit Tax Forms
In 2022, you apply for the federal EV tax credit when you file your tax return. You will have to file Form 8936 with your tax return.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.