Understanding Federal EV Tax Credits: What You Need to Know

If you’re in the market for a new car, the federal government supports buyers who go electric. Thanks to the Inflation Reduction Act passed in 2022, significant tax credits are now available for purchasing or leasing electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs) starting in 2023. Tax benefits may change under the new administration, but you can take advantage of EV tax credits while available.

How do these credits work, and how can you benefit? Let’s break it down.

4 Ways to Take Advantage of Federal EV Tax Credits

1. Buy a New EV
   Purchase a qualifying new EV to claim the clean vehicle credit, offering up to $7,500 in tax benefits.
2. Buy a Used EV
   Opt for a qualifying used EV to claim the previously owned clean vehicle credit, which can provide a credit of up to $4,000.
3. Buy an EV for Business Use
   Claim the commercial clean vehicle credit for EVs purchased for business purposes, offering a credit of up to $7,500.
4. Lease an EV
   Instead of buying, you can lease an EV and enjoy discounts passed on by the dealer, thanks to their ability to claim the commercial clean vehicle credit.

Why Leasing an EV is Gaining Popularity

Surprisingly, leasing has become the most common way to benefit from these credits, with nearly two-thirds of EV drivers choosing to lease rather than buy. Why is this happening? Many potential buyers are finding it challenging to meet the strict eligibility requirements for the clean vehicle credit, making leasing a more accessible option.

Navigating the Restrictions

The clean vehicle credit, capped at $7,500, was designed to be the primary tax incentive for personal and business EV purchases. However, its limitations include:

• Income Caps: Eligibility depends on the buyer’s income.
• Price Caps: The EV’s purchase price must fall under certain thresholds.
• Domestic Sourcing Requirements: Only vehicles with components manufactured or assembled in the U.S. qualify.

Currently, only a limited number of EV models meet these criteria, narrowing the options for buyers. The previously owned clean vehicle credit, worth up to $4,000, has even stricter requirements, with lower income limits and a $25,000 price cap on eligible vehicles. On the other hand, the commercial clean vehicle credit offers greater flexibility. It is not subject to income or price caps, nor does it have domestic sourcing requirements. Instead, the credit amount depends on the vehicle’s depreciable tax basis, making it an attractive option for business owners.

The Advantage of Leasing

For many consumers, leasing provides a simpler path to savings. When you lease an EV, the dealer claims the $7,500 commercial clean vehicle credit and passes the benefits to you. This could mean:

• Lower monthly lease payments
• Reduced down payments
• Immediate rebates

With leasing, there’s no need to navigate the complexities of applying for a tax credit yourself.

Maximize Your Tax Benefits

While federal tax credits have made EVs more financially accessible, understanding the details and restrictions is key to maximizing the benefits. Whether you buy or lease, it’s essential to explore your options and choose the route that works best for your budget and driving needs.

For help with all your financial planning and tax preparation needs, contact Illumination Wealth.