Don't Mess With Taxes

Election results, however, could change that. Here's how to claim the alternative fuel vehicle tax credit now, just in case things change after the Nov. 5 results.

Republican presidential nominee Donald J. Trump has softened his stance on electric vehicles, likely because of his burgeoning personal relationship with Tesla CEO Elon Musk.

But even though Trump says he’s now “totally for” EVs, he also says he would consider eliminating a $7,500 tax credit for some of the vehicles.

“Tax credits and tax incentives are not generally a very good thing,” Trump told Reuters after a campaign event Monday, Aug. 19, in York, Pennsylvania.

If you’re considering an EV purchase, want (or need) the tax break to buy it, and are worried about that benefit being axed by a Trump return to the White House, here’s what you need to know to claim it now.

Types of EV tax credits: The $7,500 credit mentioned by Trump is just one tax break for potential buyers of these autos.

The $7,500 credit applies to the purchase of a new, qualified plug-in EV or fuel cell electric vehicle (FCV). The Inflation Reduction Act of 2022 changed the rules for this credit for vehicles purchased from 2023 to 2032.

There’s also a tax credit for 30 percent of the sale price, up to a maximum $4,000, if you buy a qualified used EV or FCV.

The great thing about a tax credit is that it reduces any tax you owe dollar-for-dollar. Note, however, that the EV/FCV tax credits are nonrefundable. The amounts can be used to reduce any tax you owe, but if you have more tax credit than tax liability, you cannot get the excess credit back as a refund.

But reducing or wiping out your tax bill certainly is worthwhile, especially if you’re getting the tax break in connection with a transportation method you want.

Cash up front instead of waiting to file: Now, however, EV buyers don’t have to wait until tax filing season to get the financial benefit of an EV tax credit.

Starting this year, EV buyers can transfer the credit to an eligible dealer for an immediate discount at the dealership on the vehicle they want, rather than waiting to file Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit (Including Qualified Two-Wheeled Plug-in Electric Vehicles) when they file their tax returns.

Essentially, the seller will apply the credit amount to the EV’s final purchase cost. The dealer then will be reimbursed the credit amount by Internal Revenue Service.

Note, though, that even if you transfer the credit to the dealer, you’ll still have to fill out and file Form 8936 with your annual tax return. This enables the IRS to confirm your eligibility for the credit, and your decision to transfer the credit to the dealer.

But added auto purchase and post-purchase paperwork aside, transferring the EV tax credit is the better move for most buyers. It means you won’t have to put down as much cash for the car, or take out a larger loan, when you buy a credit-eligible EV.

EV tax credit price limits: Like most other tax breaks, the EV benefit is limited, both by the cost of the more environmentally-friendly and the driver’s income.

The price cap for a new sedan and other standard passenger cars to qualify is a an MSRP, or manufacturer's suggested retail price (MSRP) of $55,000 or less. New vans, SUVs, and pickup trucks must have an MSRP of $80,000 or less to qualify. The cap for all used electric

Any car buyer can tell you the MSRP tends to inch up as the purchasing process goes along. But here’s some good news for EV purchasers. The MSRP does not include taxes and other fees added on by the dealer for the credit’s price cap purposes.

Buyer income limits: The second and third set of dollars that come into play with the EV tax credit is the limit on the income of the purchasers.

You can claim the credit for a new EV if your modified adjusted gross income (MAGI) cannot exceed —

• $300,000 for married couples filing jointly or a surviving spouse,
• $225,000 for heads of households, or
• $150,000 for all other filers.

If you’re buying a previously owned EV, your MAGI cannot be more than —

• $150,000 for married filing jointly or a surviving spouse,
• $112,500 for heads of households, or
• $75,000 for all other filers.

You MAGI, as noted in (shameless plug alert) the ol’ blog’s glossary, is calculated by starting with your adjusted gross income (AGI) and then adding back certain amounts you previously subtracted to get to your MAGI. The precise deductions you have to reconsider usually depend on the tax benefit that uses your modified amount. 

For the EV credit, your MAGI is your AGI, shown on line 11 of your Form 1040, plus any amount of foreign earned income, found on line 45 or line 50 of Form 2555, and any amount you excluded from your gross income because you got it from sources in Puerto Rico or American Samoa.

So, for most EV buyers, their MAGI will be the same as their AGI.

The IRS also points out that you can use your MAGI from the year you take delivery of the vehicle or the year before, whichever is less.

You can read more about vehicle price caps, purchasers’ income limits, and more in the IRS’ frequently asked questions, updated in July, about clean vehicle credits. National Taxpayer Advocate Erin Collins also examines Electric Vehicle Tax Credits Issues and Pitfalls in a recent blog post.

Also, don’t forget to check into possible state and local tax benefits for buying an alternative fuel vehicle. The U.S. Department of Energy (DoE) has an interactive map of state laws and incentives related to alternative fuels and advanced vehicles.

Qualifying vehicles: But wait, what about the actual vehicles? As you’ve already guessed, there are limits on those, too.

To qualify for the new EV tax credit, a vehicle must meet the following requirements.

• Have a battery capacity of at least 7 kilowatt  hours,
• Have a gross vehicle weight rating of less than 14,000 pounds,
• Be made by a qualified manufacturer,
• Undergo final assembly in North America, and
• Meet critical mineral and battery component requirements, as of April 18, 2023.

As for previously-owned EVs, in addition to meeting the $25,000 or less price cap, they must —

• Have a model year at least 2 years earlier than the calendar year when you buy it. For example, a vehicle purchased in 2023 would need a model year of 2021 or older.
• Not have already been transferred after August 16, 2022 to a qualified buyer.
• Have a gross vehicle weight rating of less than 14,000 pounds.
• Be an eligible FCV or plug-in EV with a battery capacity of least 7 kilowatt hours.
• Be for use primarily in the United States.

Yikes! That’s a lot to account for, even if you’re a motorhead or car buyer who likes doing a lot of pre-purchase homework.

Personally, I’m all for working smarter, not harder, so I’m referring you to the Energy Department's Office of Energy Efficiency and Renewable Energy. Its FuelEconomy.gov website has a page where you can find tax-credit-eligible new vehicles, and another for qualifying used EVs.

If you prefer perusing a list of eligible autos, check out Consumer Reports’ article on Electric Cars and Plug-In Hybrids That Qualify for Federal Tax Credits, as well as Car and Driver’s collection of the Environmental Protection Agency’s List of every EV Eligible for the Federal Tax Credit.

These resources should help you find the EV, new or used, that fits your transportation, financial, and tax needs. Just in case you want to buy one and get the tax credit before the Nov. 5 results possibly mean the end of it.

You also might find these items of interest:

• Texas joins the electric vehicle fee club
• Electric vehicle tax credits favor the wealthy
• Treasury issues $1B+ in point-of-sale clean vehicle tax credits

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