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That Historical climate legislation President Joe Biden signed into law in August, offering up to $7,500 in federal tax breaks to households who buy new electric vehicles.
But it can be difficult for consumers to get the full value of the tax credit — at least initially.
This is largely due to the structure of the clean vehicle credit and specific requirements for consumers and automakers. However, these roadblocks are likely to ease in the long term, experts said.
Dubbed the Inflation Reduction Act, the legislation made the tax credit “non-refundable.”
That means consumers can only get the full financial benefit if they have at least $7,500 in federal tax liability. A non-refundable credit settles a consumer’s federal tax bill, but the remaining value is lost.
Suppose a consumer buys an electric vehicle today. When filing their 2022 tax return, the individual discovers that they owe $5,000 in federal taxes. That person wouldn’t get the full $7,500 tax credit — they could claim $5,000 and reduce their tax bill to zero. But the remaining $2,500 would be lost. In other words, these monies would not be returned to the consumer in the form of a tax refund.
Furthermore, unlike some other tax credits in the bill – such as “Pure Residential Energy” credit for solar panels and other home installations — an unused value is not carried over to future tax years to settle a future tax bill.
“That’s kind of the crap” of the loan, said Dan Herron, a board-certified public accountant and board-certified financial planner based in San Luis Obispo, Calif.
High-income consumers are generally most likely to benefit from full credit compared to more modest-income consumers because they tend to have higher tax bills, Herron said. However, the loan comes with some additional restrictions – such as an income cap, discussed in more detail below – that will limit how many of these households can benefit.
Meanwhile, middle- and low-income shoppers typically have lower tax bills, which means they’re more likely to not get full credit, Herron said.
States, municipalities, and utilities may also offer financial grants when buying electric vehicles.
Consumers looking to buy an EV who feel their tax bills are too small to get the full $7,500 can take steps to increase their tax liability — and thereby maximize the value of the loan.
Investors can consider, for example Conversion of a pre-tax retirement account into a Roth, a kind of after-tax account; You would owe income tax on that conversion. Investors may also consider selling winning shares or other assets capital gains tax apply.
“If you’re reaping some profits or you have some extra income you can move to 2022, maybe consider that,” Herron said.
Workers can also adjust the tax withholding on their paychecks, choosing to withhold less, thereby increasing the taxes they owe.
However, Herron does not recommend this route due to possible unknowns. For example, an unexpected bonus during the year may result in a larger than expected annual tax bill, depending on the withholding tax adjustment.
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Aside from the structure of the tax credit, the Inflation Reduction Act imposes requirements on the new clean vehicles themselves, which can limit the value of your tax break.
As of August December, when Biden signed the Inflation Reduction Act, final assembly of the car must be done in North America to qualify for a tax break. The US Department of Energy has a sheet of vehicles that meet this standard.
From 2023 further regulations will come into force.
First, there are income caps. A tax credit is not available to single individuals modified adjusted gross income from $150,000. The cap is higher for others — $225,000 for heads of household and $300,000 for married couples filing joint returns. (The test applies to current or previous year’s income, whichever is lower.)
And certain cars may not qualify based on price. Sedans selling for more than $55,000 are not eligible, nor are vans, SUVs, or trucks over $80,000.
Two other rules apply to crafting: one contains requirements for sourcing the car battery’s critical minerals; The second requires some of the battery components to be manufactured and assembled in North America. Consumers lose half the value of the tax credit – up to $3,750 – if any of these requirements are not met; They would lose the full $7,500 if they failed to meet both.
It’s unclear which electric vehicles will meet those standards and qualify for a tax credit next year. There is a possibility that none will qualify immediately, corresponding at the Alliance for Automotive Innovation.
“There’s a lot of uncertainty,” said Joel Levin, executive director of Plug In America.
“If you need a car, I think it’s risky to delay the purchase in hopes of getting the loan,” he added. “It may not work out or it may take a couple of years before it’s eligible.”
Another consideration: Consumers buying a Tesla or General Motors model before the tougher rules come into effect in January. 1 are not eligible for a tax benefit based on previous parameters around sales caps that expire at the end of the year.
There is also another option: buying a used electric vehicle instead of a new one.
The Inflation Mitigation Act created a “credit for previously owned clean vehicles” worth up to $4,000 starting in 2023. The tax break comes with some restrictions (like a $25,000 cap on the car’s sticker price and lower income caps for consumers), but it doesn’t support the manufacturing and assembly requirements of new cars.
Consumers willing to wait until 2024 to buy a new or used car — and get the tax break that comes with it — have the most consumer-friendly option available, experts say.
Because the climate law then allows a buyer to transfer his tax credit to the car dealer. A merchant who is required to register with the US Treasury Department would receive an upfront payment of the consumer tax credit from the federal government.
As a result, consumers can likely receive the full tax credit at the point of sale from the car dealer as a discount off the sticker price or as a reduction in the vehicle’s down payment, Levin said. And they get that discount even if they don’t have a tax liability, he added.
“It makes the loan a lot more valuable to people, especially people on moderate incomes who don’t have a lot of money in their pockets for the down payment,” Levin said.