The Inflation Reduction Act has ushered in a new era of clean energy tax incentives and credits, with the $7,500 electric vehicle (EV) credit topping the list.
With over 800,000 EV's sold last year and an estimated 1 million EV's to be sold this year, many Americans have the chance to line their pockets with substantial extra cash.
But confusion on how best to claim this money has many potential EV buyers scratching their heads. There are different qualifications depending on when you purchased your vehicle, and not everyone is entitled to the full credit amount.
Thankfully, the IRS laid out the details so no one will miss out on the money they deserve.
Charging up Your Savings
The Inflation Reduction Act, signed into law in August 2022, contains a $7,500 tax credit for purchasing plug-in hybrid electric vehicles (PHEV), electric vehicles (EV), and fuel cell vehicles. The act extends and modifies an existing tax credit to 2032 and eliminates the earlier criteria qualifying a vehicle for the credit.
If you are purchasing your vehicle after January 1, 2023, there is a list of requirements you need to meet to qualify for the tax credit, which includes the following:
- Purchase the vehicle for your own use
- Use it primarily in the United States
- Having a modified gross adjusted income of less than $300,000 for married couples filing jointly, $225,000 for heads of households, or $150,000 for all other filers
The IRS states you can use your modified adjusted gross income from the year you took delivery or the year before, whichever is less.
Additionally, the vehicle you purchase needs to meet specific criteria, including:
- A battery capacity of at least 7-kilowatt hours
- Have a gross vehicle weight rating of fewer than 14,000 pounds
- Made by a qualified manufacturer, with an exception for fuel cell vehicles
- Undergo final assembly in the United States
- Have a manufacturer's suggested retail price of less than $80,000 for vans, SUVs, and trucks or less than $55,000 for all other vehicles
- Must be purchased new
To confirm if a manufacturer is qualified, new car buyers can review this list provided by the IRS. Additionally, one can use this frequently asked questions guide offered by the IRS.
Claiming Your Tax Credit
For filers to claim the tax credit, they need to file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit (Including Qualified Two-Wheeled Plug-in Electric Vehicles with their tax return, along with the vehicles Vehicle Identification Number or VIN.
When claiming the credit, the maximum amount is $7,500, but not everyone will qualify for this amount. The amount each individual qualifies for depends on the taxes you owe. If you owe $5,000 in taxes, this would be the maximum EV tax credit you qualify for. Any unused portion of the tax credit does not carry over to future years.
The Evolving Tax Credit
It is important that anyone interested in purchasing a new vehicle in 2023 or who has already purchased one since January 1, 2023, pay attention to news surrounding the credit. On February 3, 2023, the US Treasury updated its vehicle classification standards, so more vehicles qualify as SUVs, allowing them to be eligible for the tax credit since their MSRP was higher than the $55,000 limit. They now qualify based on the $80,000 MSRP.
Because changes are being made to the rules to qualify for the tax credit, it is critical to stay up to date on the latest developments and speak to your accountant to ensure you are taking the maximum credit you are entitled to.
Claiming the EV Tax Credit for 2022
If the tax credit for those buying vehicles wasn't complicated enough, there are different rules for those who purchased the more than 800,000 EV vehicles in 2022 and the estimated 1 million cars expected to sell in 2023. If you bought a vehicle before August 16, 2022, when the Inflation Reduction Act went into effect, and the vehicle qualifies based on the previous tax credit guidelines, you claim the credit based on those rules.
If you purchased your vehicle between August 16, 2022, and December 31, 2022, you would follow the current Inflation Reduction Act guidelines with one exception. The final assembly in the US requirement does not apply.
Additional Ways To Save
While not everyone or every electric vehicle qualifies for the tax credit, purchasing one is still usually a smart financial move and good for the environment. But how can consumers save money on their electric vehicles?
The best option for many is to negotiate the car's purchase price. Negotiating was much more straightforward before the pandemic when supply chain issues didn't result in a shortage of vehicles to buy. But dealer lots are beginning to return to normal, which means it is in the buyer's best interest to try to score a deal.
From there, if you live in a state with electric deregulation, you should shop for the lowest-cost supplier. PECO's current electricity rate in Pennsylvania is $0.098 per kilowatt hour. A quick search shows prices as low as $0.07.
Finally, it is vital to thoroughly analyze all the costs associated with buying a new vehicle. Keeping your current vehicle longer or buying a certified pre-owned vehicle could be a more intelligent financial move.
The last thing you want to do is to make the mistake of only taking one factor into account and paying more in the long run, a common mistake many people make when buying traditional hybrid cars. While it is important to look at the gas savings with these vehicles, many consumers don't consider the higher purchase price. The higher purchase price can be thousands of dollars, offsetting the savings at the pump.
This post was produced by Money Smart Guides and syndicated by Wealth of Geeks.
Jon is the founder of MoneySmartGuides, which helps people dig out of debt and start building wealth so they can achieve their dreams. He has over 15 years of experience in the financial services industry and 20 years of investing in the stock market. He has both his undergraduate and graduate degrees in Finance and is FINRA Series 65 licensed, and has a Certificate in Financial Planning.