Fewer cars qualify for a $7,500 electric vehicle tax credit. Here are 2 alternatives

The number of new electric vehicles eligible for a $7,500 federal tax credit was nearly cut in half on Tuesday as new rules issued by the US Treasury Department took effect.

However, consumers in the market for a passenger electric vehicle can still access a tax break by buying a used electric vehicle or leasing a vehicle, experts said.

The Inflation Reduction Act, which President Joe Biden signed into law in August, is the most ambitious climate spending package in US history.

Among other measures, the law offered tax incentives to encourage Americans to switch to cleaner cars and trucks that don’t burn fossil fuels.

It extended an existing non-refundable tax credit, worth up to $7,500, through 2032 for consumers purchasing new electric vehicles. But the law also changed the eligibility requirements for car buyers and manufacturers.

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For example, as of August 17, final assembly of the car was to take place in North America.

The law also directed the Treasury Department to draft two additional rules that apply to the procurement of car battery components and critical minerals. Lawmakers aim to encourage automakers to build batteries using domestic supply chains instead of relying on countries like China for essential parts.

These requirements begin on April 18 and are phased in over several years. Auto and tax experts had expected the number of electric vehicles eligible for the full $7,500 to drop temporarily as automakers ramp up their supply chains.

Before Tuesday, 41 new vehicles from 14 automakers were eligible for at least a partial tax credit in 2023, according to a list compiled by the US Department of Energy.

Now, 22 cars from seven car companies — Cadillac, Chevrolet, Chrysler, Ford, Jeep, Lincoln and Tesla — can benefit from at least a partial tax break, about half the number on the original list.

Cars made by Audi, BMW, Genesis, Nissan, Rivian, Volkswagen and Volvo are no longer eligible at this time, according to the Energy Department’s list.

Price-conscious consumers who want to buy an electric car or truck and claim a tax break, but don’t see a car they like on the existing list of qualifying new electric vehicles, have other avenues, including fewer restrictions.

The Inflation Reduction Act also created a tax credit for consumers who buy used electric or fuel cell vehicles.

The used car tax break, which came into effect this year, is worth $4,000 or 30% of the sale price, whichever is less.

This “previously owned clean vehicle credit” does not include any of the manufacturing rules attached to new electric vehicles, making it an alternative solution for consumers who are in the market for an electric vehicle and want to maximize their fiscal savings

“If the new vehicle you want is not eligible [for the $7,500 credit]you may be able to save some money [by buying a used EV] and get a tax credit,” said Ingrid Malmgren, director of policy at Plug In America.

The used vehicle credit applies to a wide selection of cars, he said. Consumers can check an IRS list to verify which used vehicles qualify.

Here are some of the criteria for cars and consumers to qualify for credit:

• The car must be purchased from an authorized dealer.
• Model year must be at least 2 years old.
• Sale price must be $25,000 or less.
• It is only available to individuals, not businesses.
• Buyers are not eligible for a credit if their annual income exceeds certain thresholds: $75,000 for singles, $112,500 for heads of household and $150,000 for married couples filing a joint tax return. Buyers assess their income for the year they purchased the car or the previous year, whichever is less. (Income is measured as “modified adjusted gross income.” You can refer to this FAQ to determine how to calculate modified AGI.)

Those income limits are “well below” what applies to the $7,500 new vehicle tax credit, said Katherine Breaks, managing director of KPMG’s tax credit and energy advisory services group. The income thresholds associated with new cars are double those for used electric vehicles.

Both new and used credits are non-refundable, meaning car buyers must have a tax liability to get any value from the tax breaks.

“If I don’t have $4,000 in taxes, what’s the tax credit worth to me? Not much,” Breaks said of the used vehicle credit.

However, from 2024, a new mechanism will start for new and used cars whereby buyers can transfer their tax credits to dealers, perhaps allowing dealers to convert the tax break into a point-of-sale discount for to consumers instead of a benefit that can only be claimed when an annual tax return is filed, experts said. The IRS plans to issue additional guidance on this carryover provision.

Alternatively, consumers also appear willing to get a tax break of up to $7,500 for leasing new electric passenger vehicles.

Malmgren said this tax break does not include manufacturing requirements associated with new car purchases. That means a larger number of vehicles are likely to qualify at first, making the provision a loophole for consumers looking to lease a car.

“There are very few restrictions that apply,” Malmgren said.

The Inflation Reduction Act created this “qualified clean commercial vehicle credit” for business owners. Automakers have leasing or financing affiliates that buy electric vehicles for commercial purposes and then lease the cars to consumers, at which point they can pass on the associated tax break, Malmgren said.

“Most manufacturers have indicated very clearly that they will pass the full amount [to consumers]” Malmgren said of the $7,500. “But you have to check. Because not everyone transmits it.”