The ‘bummer’ of the $7,500 electric vehicle tax credit: It can be hard to get its full value

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The landmark Climate Act signed by President Joe Biden in August offered federal tax credits — up to $7,500 — to families buying new electric cars.

But it can be hard for consumers to get the full value of the tax credit — at least at first.

This is largely due to the clean car credit structure and certain requirements of consumers and car manufacturers. But experts said these roadblocks are set for long-term relief.

The ‘bummer’ tax credit: It is non-refundable

The legislation, called the Inflation Reduction Act, made the tax credit “non-refundable.”

This means consumers can get the full financial benefit only if they have a federal tax liability of at least $7,500. A non-refundable credit that offsets the consumer’s federal tax bill but any remaining value is forfeited.

Suppose a consumer buys an electric car today. When filing a 2022 tax return, a person finds that they owe $5,000 in federal taxes. This person will not get the full $7,500 tax credit – they will be able to claim the $5,000 and have their tax bill reduced to zero. But the remaining $2,500 will be lost. In other words, this money will not be issued to the consumer in a tax refund.

Additionally, unlike some of the other tax credits on the bill — such as the Residential Clean Energy credit for home solar panels and other installations — any unused value does not carry over into future tax years to offset a future tax bill.

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“This is kind of a disadvantage” to the credit, said Dan Heron, a certified public accountant and certified financial planner based in San Luis Obispo, California.

Heron said higher-income consumers are generally more likely to benefit from the full credit value relative to those with more modest earnings, because they typically have larger tax bills. But the credit comes with some additional restrictions — such as the income cap, explained in more detail below — that will limit the number of those families that can benefit.

Meanwhile, middle- and lower-income buyers typically have smaller tax bills, which means they’re more likely to not collect the entire credit, Heron said.

States, municipalities, and utilities may also offer financial incentives to purchase electric vehicles.

How to manipulate your tax bill

Consumers who want to buy an electric car and think their tax bills will be too low to make the full $7,500 can take steps to boost their tax liability — and thus increase credit value.

For example, investors might consider converting a pre-tax retirement account into a Roth account, which is a type of after-tax account; They owed income tax on this transfer. Investors may also consider selling winning shares or other assets, thus incurring capital gains tax.

“If you can make some gains or have extra income that you can make into 2022, you might consider it,” Heron said.

Workers can also adjust the withholding tax on their payroll, choosing to withhold less and therefore increase the taxes they owe.

However, Herron does not recommend this path due to potential unknowns. For example, an unexpected bonus during the year could mean a larger annual tax bill than expected, depending on the withholding adjustment.

Parameters that may reduce credit

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Regardless of the tax credit structure, the Inflation Reduction Act sets requirements about new clean cars themselves that may limit the value of your tax credit.

As of August 16, when Biden signed the Inflation Cut Act, final assembly of the car must take place in North America to qualify for the tax credit. The US Department of Energy has a list of vehicles that meet this standard.

Additional rules take effect in 2023.

First, there is an income cap. The tax credit is not available to single individuals with an adjusted adjusted gross income of $150,000. The maximum limit is higher for others – $225,000 for heads of household and $300,000 for married couples who file a joint tax return. (The test applies to income for the current or previous year, whichever is lower).

Some cars may not qualify based on the price. Sedans with a retail price of more than $55,000 do not qualify, nor do vans, SUVs, or trucks over $80,000.

There is a lot of uncertainty.

Joel Levine

CEO of Plug In America

Two other rules apply to manufacturing: one bears the requirements for obtaining minerals important for a car battery; The second requires that part of the battery components be manufactured and assembled in North America. Consumers lose half the value of the tax credit—up to $3,750—if one of these requirements is not met; They will lose the entire $7,500 for failing to meet both.

It’s unclear which electric vehicles will meet these criteria and qualify for next year’s tax credit. According to the Alliance for Automotive Innovations, there is a chance that no one will qualify immediately.

“There is a lot of uncertainty,” said Joel Levine, CEO of Plug-In America.

“If you need a car, I think it’s dangerous to delay your purchase in the hope of getting credit,” he added. “It may not work or it may take two years for it to qualify.”

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One other consideration: Consumers who buy a Tesla or General Motors before stricter rules go into effect on January 1 are not eligible for a tax credit based on earlier criteria around sales limits that are due to expire at the end of the year.

There is also another option: to buy a used electric car instead of a new one.

The Inflation Control Act created a “Previously Owned Clean Vehicle Credit” of up to $4,000 starting in 2023. The tax credits come with some restrictions (such as a $25,000 cap on the car sticker and a lower rate of income for consumers) but do not carry manufacturing and assembly requirements New cars.

A more convenient option for consumers

Experts said that consumers who want to wait until 2024 to buy a new or used car – and get the associated tax credit – will have the most consumer-friendly option at their disposal.

That’s because climate law would then allow the buyer to transfer his tax credit to the car dealer. The merchant – who must register with the US Treasury – will receive an advance payment of the consumer tax credit from the federal government.

As a result, consumers are more likely to get the full tax credit at the point of sale from the auto dealer as a discount on the sticker price or a reduction in the down payment for the vehicle, Levine said. He added that they would get this discount even if they had no tax obligation.

“It makes credit more valuable to people, especially middle-income people who don’t have a lot of money in their pockets for the down payment,” Levine said.

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