Introduction
If you’re considering purchasing an electric vehicle (EV) in 2024, it’s important to stay informed about the latest changes to the federal tax credit. The tax credit for EVs has undergone significant modifications this year, making it both easier and more challenging to access. This article aims to provide you with a practical, plain-English guide to navigating the electric vehicle tax credit in 2024. We’ll explore the new instant rebate option, income cap requirements, vehicle eligibility criteria, battery-sourcing requirements, and the impact of leasing and buying used EVs. By the end of this guide, you’ll have a comprehensive understanding of how the tax credit works and how it may affect your purchasing decisions.
Instant Rebate for 2024
Starting in January, EV buyers no longer have to wait until the following year’s tax season to claim the clean vehicle tax credit. Instead, there’s a new option to take the credit as an instant rebate right when you purchase the vehicle. This means that after completing some paperwork at the dealership, the credit will be available to you as essentially cash in hand or deducted from the vehicle’s cost on the day of purchase.
To facilitate this process, the dealer confirms the eligibility of the sale for the tax credit and then credits you for the amount of the credit, such as $7,500, as if you had paid it in cash. The dealer then submits the necessary documentation to the IRS, and the IRS reimburses the dealer the credited amount. In essence, the tax credit is now being handled through the dealership.
Income Cap Requirements
Although the process for claiming the tax credit has changed, certain requirements remain unchanged. As the buyer, you need to attest that you are under the income cap, purchasing the vehicle for personal use, and intending to use it in the United States. The income cap is determined based on your “modified adjusted gross income” (MAGI), which considers your income after specific deductions like retirement contributions. While the income cap may appear confusing at first, it’s essential to understand how it works.
The income caps for new vehicles in 2024 are as follows:
- $300,000 for married couples filing jointly
- $225,000 for heads of households
- $150,000 for all other filers
It’s crucial to note that your adjusted gross income (AGI) is not the same as your total income or taxable income. AGI is calculated by subtracting certain deductions from your total income. For example, if you earn $160,000 a year as a single individual, you may assume that you don’t qualify because your income exceeds $150,000. However, contributions to a 401(k) or other deductions may lower your AGI, making you eligible for the tax credit. Consulting a tax professional or using tax software can help you accurately determine your AGI and eligibility.
Changes in Vehicle Eligibility
One significant change in 2024 is the reduction in the number of EV models that qualify for the tax credit. The government has imposed stricter requirements, resulting in fewer models being eligible for the full $7,500 credit. For instance, some versions of the Tesla Model 3 no longer qualify. It’s crucial to be aware of these changes when considering which EV models are eligible for the tax credit.
To qualify for the tax credit, fully electric vehicles and plug-in hybrid vehicles must meet specific requirements such as battery size, vehicle weight, and two additional criteria:
- Assembled in North America: The vehicle must be assembled in North America to be eligible for the tax credit.
- Price Cap: The vehicle’s sticker price (MSRP) must be less than $55,000 for cars or $80,000 for SUVs and trucks.
Determining whether a vehicle meets these requirements can sometimes be challenging due to features that can increase the sticker price or vehicles being assembled in multiple locations. Dealerships can provide verification regarding whether a specific vehicle meets the eligibility criteria.
Battery-Sourcing Requirements
In addition to the basic eligibility requirements, the $7,500 tax credit consists of two separate credits, each worth $3,750. To qualify for both credits, the batteries used in the vehicles must meet specific sourcing requirements. These requirements aim to promote a domestic supply chain and reduce reliance on China for critical battery components.
One credit focuses on the raw materials inside the batteries, such as lithium, graphite, and cobalt. A certain percentage of these critical minerals must be mined or processed in the U.S. or a trade partner country. The other credit is related to battery manufacturing, requiring a certain percentage of the battery’s components, including anodes, cathodes, and electrolytes, to be manufactured or assembled in North America.
It’s important to note that these percentages increase each year, making it more challenging for vehicles to meet the battery-sourcing requirements. Additionally, starting in 2024, battery components cannot come from companies controlled by China. These requirements contribute to the constant changes in the list of qualifying vehicles.
Updated List of Qualifying Vehicles
The list of EV models that qualify for the tax credit is frequently updated due to changing eligibility criteria and sourcing requirements. As of early January 2024, several notable EV models still qualify for the tax credit, including the Chevy Bolt EV and EUV, F-150 Lightning, Rivian R1T and R1S, and Tesla Model Y. However, it’s important to be aware that not all versions of the Tesla Model X and Model 3 qualify for the tax credit, with the cheapest Model 3 no longer being eligible. Some plug-in hybrid models may still qualify, but the list of eligible all-electric models has significantly decreased.
It’s crucial to stay updated on the list of eligible vehicles, as automakers are actively working to adjust their supply chains to restore eligibility. For example, Volkswagen has expressed optimism about the eligibility of its Tennessee-built ID.4 models under the new rules. Therefore, checking fueleconomy.gov regularly for updates on eligible vehicles is essential.
Leasing an EV: Fewer Restrictions, Greater Flexibility
If you’re interested in leasing an EV, you’ll discover that leasing offers far fewer restrictions compared to purchasing. Leased vehicles are eligible for a version of the tax credit that is easier to qualify for, providing more flexibility for consumers. Leasing an EV does not require the vehicle to be made in America, nor does it have a price cap or income cap restrictions.
When you lease an EV, the tax credit goes to the leasing company rather than the driver. Although companies are not obligated to pass on the savings to consumers, they typically offer a bonus applied at the start of the lease, effectively reducing the monthly payment. It’s important to carefully review the lease contract to ensure that the discount is passed along to you and to understand all terms and conditions.
Leasing an EV may be a suitable option if you’re interested in driving a vehicle that doesn’t meet the price, income, or sourcing criteria for the tax credit. However, it’s important to consider factors such as mileage caps and the fact that you won’t own the vehicle outright at the end of the lease term.
The Benefits of Buying Used EVs
If the prices of new electric vehicles seem overwhelming, buying a used EV may be a more affordable option. The tax credit also applies to used EVs, providing a credit worth 30% of the sales price, up to $4,000. However, there are specific income and price cap requirements for used EVs.
To qualify for the used EV tax credit in 2024, the individual income cap is $75,000, and the household income cap is $150,000. The vehicle’s cost must be less than $25,000. It’s essential to note that this tax credit only applies to vehicles sold as used since mid-2022. Purchasing a used EV from a registered dealership is necessary for claiming the credit.
While availability of used EVs may be limited, the falling prices in the used EV market make qualifying vehicles more accessible. It’s worth exploring options and considering a used EV if the price range and income requirements align with your budget.
Business Tax Credit for EVs
If you run a business, you may be eligible for a separate commercial tax credit for EVs. This credit offers up to $7,500 for light vehicles and up to $40,000 for larger vehicles like delivery trucks. The commercial tax credit has fewer restrictions in terms of price caps or sourcing requirements, focusing primarily on the vehicle’s business use.
The amount of the commercial tax credit depends on the purchase price of the vehicle. The IRS provides detailed guidelines outlining the credit amounts for different vehicle categories. Business owners should consult these guidelines and consider the potential benefits of the commercial tax credit when making EV purchasing decisions for their businesses.
Conclusion
The changes to the $7,500 tax credit for electric vehicles in 2024 have significant implications for EV buyers. With the introduction of the instant rebate option, accessing the tax credit has become more convenient. However, the reduction in the number of qualifying models and the stricter requirements for battery sourcing make it essential to stay informed about vehicle eligibility.
Leasing an EV offers greater flexibility and fewer restrictions, providing an alternative for those interested in vehicles that don’t meet the tax credit criteria. Additionally, buying a used EV can be a more affordable option, with a separate tax credit available for qualifying vehicles.
Understanding the income cap requirements, vehicle eligibility criteria, and the impact of battery-sourcing requirements will help you navigate the tax credit landscape effectively. Whether you’re purchasing an EV for personal use or as a business owner, being aware of the tax credit options and their implications will assist you in making an informed decision that aligns with your needs and goals.
Remember to consult with tax professionals, review the latest information, and stay updated on the evolving list of eligible vehicles to ensure you maximize the benefits of the electric vehicle tax credit in 2024.
