The $7,500 electric vehicle tax credit’s full value may be hard to get

The historical climate law President Joe Biden signed in August a proposal to reduce federal taxes — worth up to $7,500 — for households buying new electric vehicles.

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

That is largely due to the structure of the clean car credit and certain requirements for consumers and car manufacturers. However, those barriers are poised to ease in the long term, experts say.

Also, unlike some other tax credits in the bill – such as “civil clean energy” credit for home solar panels and other installations – any unused value will not be carried forward to future tax years to offset future tax bills.

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“It’s a pity,” said Dan Herron, a certified public accountant and financial planner based in San Luis Obispo, California.

High-income consumers often benefit from the full value of the credit compared to those with more modest incomes, Herron said, because they often have larger tax bills. But the credit comes with some additional restrictions — such as income limits, explained in more detail below — that will limit the number of households that can benefit.

Meanwhile, lower- and middle-income buyers typically have smaller tax bills, meaning they’re more likely to not collect enough credit, Herron said.

States, municipalities, and utilities may also provide financial incentives to buy an electric car.

For example, investors may consider convert pre-tax retirement accounts to Roth, a type of after-tax account; they will owe income tax on that conversion. Investors may also consider selling winning stocks or other assets, thus subject to capital gains tax.

“If you can pull in some gains or get some extra income you can pull into 2022, maybe you should consider that,” Herron said.

Workers can also adjust the tax deduction on their payslip, choosing to deduct less and thus increase the tax they pay.

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

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

The additional rules take effect in 2023.

First, there is an income limit. A tax credit is not available to single individuals with adjusted adjusted gross income 150,000 dollars. The limit is higher for others – $225,000 for head of household and $300,000 for married couples filing jointly. (The test applies to the current or previous year’s income, whichever is less.)

And certain cars may not qualify based on price. Sedans with a retail price of more than $55,000 are not eligible, as are vans, SUVs, or vans over $80,000.

Two other rules apply to manufacturing: One rule sets forth requirements for the supply of important minerals in car batteries; The second requires part 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 one of those requirements is not met; they will lose the entire $7,500 for failing to meet both.

It remains unclear which electric vehicles will meet these standards and qualify for the tax deduction next year. There’s a chance that no one can qualify right away, follow for the Alliance for Automotive Innovation.

“There is a lot of uncertainty,” said Joel Levin, chief executive officer of Plug In America.

“If you need a car, I think it’s risky to delay the purchase in the hope of getting credit,” he added. “It may not work or it may take a couple of years until it qualifies.”

Another consideration: Consumers who purchase a Tesla or General Motors model before the stricter regulations begin January 1 will not be eligible for a tax break based on previous parameters around. around the sales cap expires at the end of the year.

There’s also another option: buy a used EV instead of a new one.

The Inflation Reduction Act created a “previously owned clean vehicles credit” of up to $4,000 starting in 2023. The tax relief comes with some limitations (like limits). $25,000 on sticker price of the car and lower income limit for consumers) but does not fulfill the production and assembly requirements of the new car.