Buying an electric car? You can get a $7,500 tax credit, but it won't be easy

Uncle Sam wants you to buy an electric vehicle. And he's willing to throw $7,500 your way to make it happen ... if you and the model you want both qualify.

The tax credits for purchasing electric vehicles (EVs) got a major overhaul on Jan. 1. EV tax credits have been around for years, but they were redesigned as part of President Biden's massive climate bill signed into law last year. And in the process, they got complicated. Really complicated.

And to add to the confusion, a car that's eligible now might get zilch come March, when the rules may change again.

Here's what you need to know if you're considering shopping for an electric vehicle. It's a lot. (And this guide only covers the federal tax credit — state and local governments may offer other incentives.)

Not every electric vehicle qualifies for the credit

It's important to be mindful of which cars are eligible for the tax credit.

Some Teslas, Chevys and Toyotas are, for example, eligible for the $7,500 tax credit. But other models will not be, like the expensive Lucid Air or the foreign-built Kia EV6.

Plug-in hybrid vehicles continue to qualify for the credit, as well as fully electric vehicles, provided they meet a laundry list of restrictions.

So which cars are now eligible? There's a list on the IRS website but — big, big caveat — just because a vehicle is on the list doesn't mean it actually qualifies. Read on to learn more about the other limitations.

There are price caps, for cars and SUVs

Only vehicles that cost less than $55,000, or less than $80,000 for trucks and SUVs, can get a tax credit.

That may sound generous, but electric vehicles are pricey. Jessica Caldwell, the executive director of insights at Edmunds, points out that most EVs sold today cost over 60 grand. "It's going to be hard to get a vehicle at these prices," she says.

In fact, some vehicles that are listed on the IRS website as potentially eligible for a credit actually don't qualify right now, because their price is too high. (We're looking at you, Cadillac Lyriq.) But the Nissan Leaf and Chevy Bolt, for instance, are safe bets.

The difference between a car and SUV is confusing

Whether a vehicle is subject to that $55,000 cap, or an $80,000 cap, is not at all intuitive.

For instance, the IRS says the Volkswagen ID.4 is a car ... unless it has all-wheel drive, in which case it's an SUV. Lots of vehicles consumers consider SUVs, like Tesla's Model Y and the plug-in Lincoln Corsair, are counted as cars.

The IRS says the categories are based on the criteria for fuel economy for gas-powered vehicles, but the seemingly arbitrary classifications are causing confusion and frustration.

You can check the IRS website to see which price cap applies to which vehicle. Then you have to check the manufacturer's website to confirm if the MSRP is under that price — and for the record, it doesn't matter if a dealer actually charges you more or less, the price cap is based on the MSRP.

Vehicles have to be made in the U.S.

This means some vehicles, like the Kia EV6 and Hyundai Ioniq, are simply not eligible for a purchase credit right now. (But you might be able to lease them! Read on for more.)

Others, like the Volkswagen ID.4, require some detective work. Some ID.4s were made in Germany and don't qualify for a credit. But if you're looking at one built in Chattanooga, Tenn., it qualifies.

You can use an individual vehicle's VIN to look up whether it was made in the U.S. And yes. That's a bit of a hassle.

A bunch of cars will stop qualifying in March (probably)

Last summer's big climate law limited the tax credit by adding strict sourcing requirements for the battery components. Because battery supply chains have historically been concentrated in Asia, carmakers will likely struggle to meet those requirements.

And for now ... they don't have to. Until the IRS figures out the rules for meeting those requirements, which will be March at the earliest, the Treasury Department says the restrictions simply don't apply.

Sen. Joe Manchin, D-W.Va., who added the requirements in order to boost American manufacturing, is very upset about this — but for car buyers, there's a window of opportunity. Cars that qualify for $7,500 right now may only get $3,250, or no credit at all, come March.

And the IRS is clear: When it comes to the timing of a purchase, it doesn't matter when you pay for a vehicle, it matters when you have the vehicle in your possession.

Should you run out and try to get a vehicle immediately? Maybe!

"I would say if there was an EV that you're interested in, that today qualifies for a full $7,500 tax credit and you know that it qualifies and you know that it's available on a dealer lot — you should go and buy it," says Keith Barry of Consumer Reports.

The bit about the dealer lot is important. Wait times for electric vehicles have been incredibly long, so if you order a vehicle, eligibility rules may change before it arrives at your dealership.

Also, Barry says, you may need to be flexible on things like color and features if you want to get a vehicle by March. But don't budge on the big stuff, like the model of car you want.

"Don't go out there and and buy an unreliable EV just because it'll qualify for this tax credit," he advises.

You can't make too much money (or too little)

The new climate law also added income limits for the tax credit: a maximum of $300,000 for a household, $150,000 for an individual or $225,000 for a head of household. That's a big chunk of change, but because electric vehicles are so expensive, it will disqualify a fair number of buyers.

Note that income limit is adjusted gross income, or AGI, not your total income. Contributions to a retirement account, among other things, reduce a taxpayer's AGI. Also, if you are over the cap in 2023 but were under the cap in 2022 you are still eligible. If any part of this paragraph seems relevant to your life, you'll probably want to talk to a tax advisor about your eligibility.

On the other end of the income spectrum, for the next year, you have to owe at least $7,500 in taxes to get the full benefit of the credit. That's because the credit is applied against your tax bill (for vehicles purchased in 2023, you'll get the credit when you file in 2024) — and you don't get a refund if your tax credit is bigger than your total tax liability.

A lot of people pay less than $7,500 in income taxes. Tens of millions of people, including many who earn more than the median income.

It'll be easier to get the credit in 2024, with a big but

The government knows that nobody really wants to have to calculate their taxes next year in advance in order to figure out if they get a discount on a car or not.

And starting in 2024 you won't have to. The credit will be available as a "point-of-sale rebate," which means a car dealership would knock $7,500 off the price of the vehicle and then handle everything with the IRS. That will make it faster and just plain easier to get the credit, without having to wait for a year.

It also means you will be able to receive the discount even if you owe less than $7,500 in taxes that year.

The downside? By 2024, those stricter battery requirements may well be in place, which means no one knows for sure which vehicles will qualify for the full tax credit. We can guess — GM and Tesla may have the best shot at it — but it's just a guess.

You might be able to get the credit by leasing a car, with far fewer restrictions

If you want to lease a vehicle, you can forget everything you just read.

In late December, the IRS clarified that vehicles that are leased to consumers can be eligible for a version of the tax credit that is much, much easier to qualify for. It has no requirement that vehicles be made in the U.S., no price cap for vehicles, and no income caps. So if you want to lease a Kia EV6 from Korea, or a six-figure luxury sedan? Go to town.

The credit goes to the company leasing the vehicle out — not the person driving it — and companies aren't required to pass the savings on to consumers. But the tax credit has worked like this for years now, and companies typically have passed along the discount.

Of course, with a lease you have caps on mileage per year, and you're not paying off a vehicle that you'll eventually own free and clear. If you plan to upgrade to a newer vehicle anyway you may not mind, but be sure to consider if a lease meets your needs. Make sure the discount is actually passed along to you, and read your entire contract carefully.

For the first time, there is a credit for buying a used EV

Do the prices for new electric vehicles make you feel faint? If you buy a used electric vehicle — model year 2021 or earlier —you can get up to $4,000 back as a tax credit.

This tax credit has an income cap too: $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 they could still qualify.

And there is a price cap: vehicles must cost less than $25,000. You also have to buy the vehicle from a dealership, not from an individual.

The biggest problem may be finding a vehicle that qualifies. Used Teslas are worth more than that, and there just aren't very many other used EVs on the market right now.

You can get a very hefty credit for a business vehicle

If you run a business, you may be interested in the commercial tax credit for EVs, which provides up to $7,500 for a light vehicle and up to $40,000 for a larger vehicle, like a delivery truck.

If your vehicle can use a sedan, you may be in luck. But larger vehicles can be tough to find right now, says Hari Nayar, the VP of Fleet Electrification & Sustainability at Merchants Fleet. You want an electric pickup? Get in line.

"If somebody wants to get a pickup truck," he says, "the vehicles are not available. Even the vehicles that are available may not have the capability in terms of range or charging infrastructure."

Companies that make deliveries and could use an electric box truck, like the Ford E-transit, may be in the best position to take advantage of the credit for now, he says.

The rules might change again

Congratulations! You have now passed EV Tax Credit 101. To continue your studies, you can check out the FAQs on the IRS web site.

However ... as mentioned, the IRS still needs to issue guidance on the sourcing requirements for battery components by March, which has the potential to yet again change which vehicles qualify.

There could be a big fight about this. Manchin still wants stricter made-in-the USA requirements while many automakers want requirements loosened.

So after all the time you invested in learning about the tax credit, these rules could easily change again, and we'll all have to start over again with the basics.

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