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In order to mitigate the severe repercussions of climate change, it is imperative to transition from gasoline and diesel to electric vehicles fueled by sustainable electricity at the earliest opportunity. While operating an electric vehicle (EV) can lead to savings on fuel and upkeep costs, the initial expense of electric cars and trucks could deter individuals from opting for an EV. The federal tax credits within the Inflation Reduction Act (IRA) serve as essential mechanisms to expedite the shift and render EVs more accessible to a broader spectrum of prospective buyers by decreasing the upfront cost of both brand-new and pre-owned EVs. The Department of the Treasury and the Internal Revenue Service (IRS) recently finalized guidelines on these incentives, inclusive of the regulations concerning the transfer of the new and pre-owned EV credits, along with the stipulations on mineral and battery component origins that are relevant to the credit for new EVs. These regulations furnish enhanced clarity for manufacturers, retailers, and consumers.
Successful Implementation of Point-of-Sale Incentives
An important alteration pertaining to the Clean Vehicle Tax Credit this year has been the newfound option to transfer the credit to the dealer at the time of purchase, thereby diminishing the upfront cost of the EV. Prior to this provision, the EV tax credit was only claimable via a personal tax return filed in the subsequent calendar year, potentially up to 15 months post the EV purchase. By allowing the tax credit to be transferrable, the reduction in price occurs concurrently with the purchase, potentially reducing the required down payment or financed amount (or both).
Transferring the credit to the dealer also ensures that all eligible buyers can avail themselves of the complete value of the tax credit designated for the vehicle (usually $3,750 or $7,500, contingent upon the sourcing of critical materials and battery components). If the credit is utilized through a personal income tax return, it becomes non-refundable. This signifies that a buyer whose total tax liability falls short of the EV credit will essentially forfeit a portion of the credit. In contrast, if the credit is transferred to the dealer, the buyer could receive the entire value of the credit designated for the vehicle.
This transfer option is not limited to new EVs solely. Those purchasing qualified pre-owned EVs can also leverage the transfer provision during purchase, resulting in a deduction of up to $4,000, thereby allowing buyers of less costly pre-owned vehicles to also opt for electricity over gasoline. A prominent online retailer of pre-owned vehicles has now incorporated the credit within the checkout process, streamlining access for buyers.
The transferred EV tax credit has seen significant interest, with over 150,000 credits already transferred this year, subsequently saving EV buyers in excess of $1 billion in upfront expenses. More than 90 percent of the new EV credits have utilized the transfer provision (excluding leases), and about 80 percent of the pre-owned credits have capitalized on the point-of-sale credit.
Understanding the Clean Vehicle Credit Guidelines is Crucial
The EV credit can play a pivotal role in making EVs more economically viable for buyers, but there are crucial guidelines that potential shoppers must grasp.
Primarily, buyers can refer to the eligible model catalogue on fueleconomy.gov to ascertain the eligibility status of the model under consideration for purchase. The eligibility for the credit is dependent on myriad factors, including the manufacturer’s suggested retail price of the vehicle and the sourcing prerequisites for critical minerals and battery components in the vehicle’s battery. The models need to be eligible at the time of delivery, regardless of whether the credit is transferred or claimed via a personal return.
Although not all EVs feature on the list, there is a gradual influx as manufacturers transition production to the United States. The existing models included in the list consist of the new Chevy Equinox EV, with a base model set to be available later this year for $35,000 prior to the tax credit.
In addition to the EV being eligible, the purchaser must also meet the conditions for the credit by possessing an income below the set limits in the IRA. Buyers can utilize their adjusted gross income from the year of EV delivery or the preceding year (whichever is lower) to accommodate instances where the current year’s income status remains uncertain in relation to the set cap.
Another requisite is that the dealer must furnish a “time-of-sale” report to the buyer validating the vehicle’s eligibility and affirming that the dealer has registered the sale with the IRS. Moreover, dealers are mandated to be registered with the IRS to facilitate the transfer of the credit at the time of purchase.
The pre-owned EV credit is also subject to notable limitations. The complete prerequisites can be accessed via the IRS website, with key points comprising a maximum sale price of $25,000, a lower income threshold, and the precondition that the pre-owned vehicle must be procured from a certified dealer. The transaction should also signify the initial resale of the vehicle since August 2022 to a qualified buyer.
Note that this constitutes a brief overview of the tax credit stipulations, and prospective buyers are urged to consult the IRS guidelines and seek counsel from a tax professional regarding their entitlement to claim or transfer a credit to a dealer.
Tax Incentives Facilitate the Hastening of the EV Transition
The realm of transportation is the principal contributor to emissions, with passenger cars, trucks, and SUVs constituting the majority of transport-related emissions. Therefore, effecting a transition from petroleum to sustainable electricity to energize our vehicles is indispensable to combatting climate change.
Despite the growing number of EVs on the roads, the pace of this transition must be swift to mitigate emissions that perpetuate climate change and enhance air quality. These federal EV incentives play a pivotal role in facilitating more drivers in making the shift to EVs.
By David Reichmuth, Senior Engineer, Clean Transportation Program, Union of Concerned Scientists, The Equation
