If you’re thinking about buying an electric car in 2024, there’s good news and bad news: A big federal tax credit for electric cars will be easier next year, but fewer cars are likely to be eligible for the full $7,500 credits.
Tax credits are a key component of the Biden administration’s plan to boost the transition to electric cars and transportation-related carbon emissions.
But the government must also pressure corporations to create more jobs in the U. S. by demanding a domestic supply chain. These two goals can be in tension.
For car shoppers, the result can be confusing. We’ll do our best to help you navigate it.
Here’s a convenient guide, written in plain language, that explains how the Electric Vehicle Tax Credit will work in 2024, and adds why you may need to lease a car as well.
Starting in January, EV buyers will no longer want to wait until next year’s tax season to claim (and pocket) the clean vehicle tax credit.
Instead, there’s a new option to get the credits in the form of a reduction as soon as the vehicle is purchased. This means that after a few documents at the dealership, the credits will normally be obtained in the form of money (or, more likely, in the form of a rebate on the vehicle’s charge) on the day of purchase.
It will go like this: First, after confirming that the sale is eligible for the tax credit, the broker will pay you the cash. If you are entitled to $7,500, the broker will credit you with that cash as if you brought it in cash.
The broker then submits the paperwork to the IRS, and the IRS refunds that $7,500, indicating that the tax credits are controlled through the brokerage.
An important part of this process is that as the buyer, you need to attest that you are under the income cap, that you’re buying the vehicle for your own use and that you’re buying it to use in the United States. These requirements have not changed.
This source of income limit is based on a “modified adjusted gross source of income,” your source of income after certain deductions (such as pension contributions). This is line 11 of your Form 1040, however, if you have a foreign source of income or a Guam or Puerto Rico source of income, you’ll want to reload it.
The earning limits for new cars are as follows:
Keep in mind that adjusted gross income (AGI) is not the same as the general source of income (your salary before any deductions) or the taxable source of income (which is the AGI minus any popular or itemized deductions).
“It’s confusing,” says Alison Flores, director of the H Tax Institute
But contributions to a 401(k), for example, may simply mean that your AGI is below the limit, he explains.
What if you aren’t sure how much money you’ll make in 2024? You can use the previous year’s income to qualify — as long as you are under that cap in either 2023 or 2024, you’re eligible.
What happens if you win more than expected? If you told the broker that you were sure you met the earnings limit requirement and it turns out that you exceeded the limit in 2023 and 2024, then you will have to repay the $7,500 tax credits to the IRS when you file your taxes. by 2024. (The broker involved; it’s up to you and the IRS to figure it out. )
This is a wonderful merit of taking advantage of credits in the form of a discount: you get merits from the full credits, regardless of your tax liability.
Previously, a client had to pay at least $7,500 in taxes in a given year to get full merit for the credits. This is because the credits may reduce your tax bill to zero, but that would never result in the IRS paying you.
This worked as a minimum income, as many low- and middle-income families owe less than that in taxes. It was also another headache for others looking to figure out what the value of credits was for them.
Now, even families who don’t have tax obligations can benefit from the tax credit, which is actually a cash back for the purchase of a vehicle.
And you don’t want to calculate your taxes in advance to be sure of the amount received.
Both fully electric cars and plug-in hybrids are eligible for the tax credit. To be eligible, cars will need to meet battery life and vehicle weight requirements and, more importantly, meet any of those requirements:
It’s not always obvious which vehicles get the $55,000 cap and which get the $80,000 cap; you can confirm on fueleconomy.gov.
The features can increase the value of the sticker and some cars are assembled in different places. Dealers can check to see if those requirements are met for a personal car.
But more. . .
The number of vehicles that qualify as of now is frequently changing. Here’s why.
The $7,500 tax credit is actually two separate credits, each worth $3,750. Vehicles can qualify for both, one or neither.
To qualify, in addition to the above fundamental criteria, vehicle batteries count. This is because the fabrics used in the composition of those batteries will also need to meet the requirements of the source.
These needs are intended to inspire the auto industry to rely less on China and more on the United States for those components, for the sake of chain safety and jobs in the United States.
One of the $3,750 credits focuses on battery feedstock, meaning a certain percentage of critical minerals, such as lithium, graphite and cobalt, will need to be mined or processed in the U. S. or a trading partner.
The other provision of $3,750 is for battery manufacturing: a certain percentage of battery components, such as anodes, cathodes and electrolytes, will have to be manufactured or assembled in North America.
Every year, the percentages increase and the needs are a little harder to meet. In addition, starting next year, battery parts will no longer be allowed to come from companies controlled by China.
So which cars will qualify next year?Good question. Again, you can check fueleconomy. gov for a list of eligible vehicles; However, as of the end of December, the site had not been updated for 2024.
Some changes are likely. Tesla is warning buyers that some versions of the Model 3 will see their tax credit eligibility end after Dec. 31, and Ford believes the same is true for the Mustang Mach-E.
On the other hand, Volkswagen is “cautiously optimistic” that the Chattanooga, Tennessee-built ID. 4 will remain eligible, and General Motors says it expects to retain credits for “many” of its electric vehicles. Leaf.
Worth noting: It’s when a vehicle is delivered, not when it’s ordered or paid for, that affects which year’s requirements apply. That means if the Mach-E does drop out of eligibility in 2024, a buyer who ordered the vehicle in December but picks it up on Jan. 1 will be out of luck.
If you need to rent a vehicle, you can check out everything you just read.
Vehicles leased to consumers may be eligible for an easier-to-download version of the tax credit. It doesn’t require cars to be made in the U. S. , nor a car price cap, nor a profit cap. A South Korean Kia EV6 or a six-figure luxury sedan?Go into town.
The credit goes to the company leasing out the vehicle — not the person driving it — and companies aren’t required to pass the savings on to consumers.
But companies typically do pass along the discount in the form of a bonus applied at the start of the lease.
Of course, with a lease, you have mileage limits consistent with the year and you’re not paying for a vehicle that you end up owning for free and clearly. Be sure to determine if a lease meets your needs. Make sure that the reduction is really passed on to you and read the entire contract carefully.
EV rentals have increased especially since April 2023, when many cars were ineligible for tax credits due to battery supply restrictions coming into effect.
Do the prices for new electric vehicles make you feel faint?
Well, if they do, consider used ones. That’s because if you buy a used electric vehicle — for 2024, from model year 2022 or earlier — there’s a tax credit for you too. It’s worth 30% of the sales price, up to $4,000.
This tax credit has a much lower income cap: $150,000 for a household, $75,000 for a single person. Again, that’s adjusted gross income, meaning an individual’s salary may be higher than that and the person could still qualify.
There’s also a lower price cap: cars will have to charge less than $25,000.
Used-EV prices have been falling rapidly lately, so while availability is still pretty tight, a qualifying vehicle is easier to find now than it used to be.
A few other requirements: This will have to be the first time the car has been sold as a used vehicle since mid-2022 (that way, the IRS knows used vehicle credits are only implemented once). purchase the used vehicle from a dealership, not an individual, and that dealer will need to be registered with the IRS in order to report the sale.
Some buyers may be getting creative to meet that last requirement. The app Caramel, which is designed to facilitate private-party vehicle sales, is technically a licensed dealership. The company reports that EVs, and specifically used EVs potentially eligible for the tax credit, make up a surprisingly high percentage of transactions.
Caramel says he plans to offer the tax credits for 2024 as an upfront discount, just as a traditional dealership would.
If you have a business, you may be interested in separate advertising tax credits for electric vehicles, which give up to $7,500 for a light vehicle and up to $40,000 for a larger vehicle, such as a delivery truck.
There are far fewer restrictions on the Business Tax Credit, in terms of value limits or sourcing requirements. Of course, the vehicle must be used for professional purposes.
The amount of the credit depends on the purchase price of the vehicle: More details are here.
And note that for a single vehicle you can get either the clean vehicle tax credit or the commercial vehicle tax credit, but not both.