The News, a Good Place to Start: How Can I Claim the EV Tax Credit?

As a tax attorney, a lot of people come to me asking about different tax issues.?It usually starts with an article from the news about some recent tax-related story.?I always appreciate when people ask for my perspective before making a tax decision because prevention is a whole lot easier than triage and treatment.?

Unfortunately, a lot of people make tax decisions without talking to a professional.?These people usually end up as my clients so I can fix tax problems that could have easily been prevented.?Although the news is a good place to start, you really need to talk to a professional before making any decisions.?

Much of the time, news articles are riddled with misinformation or oversimplifications of tax issues.?This isn't necessarily the authors' fault; they're not tax professionals and are simply doing the best they can.?But you need to remember that a reporter’s job isn't to advise you personally. Their job is to tell an interesting story they can sell.?

This is why, I usually tell people that a news article is a good place to start, but they should talk to a professional before making a decision.?A good example of this comes from a recent article about the electric vehicle (EV) credit. Again, the author is doing his best, but he does misrepresent some important points about the EV tax credit.

What Is the EV Tax Credit?

There has been a lot of hype around the EV tax credit lately.?But what is it??In general, there is a tax credit available for people that purchase an electric vehicle during the tax year.?There are some nuances to it, which we will cover below, but this is the basic idea in a nutshell.

The rules generally allow a base credit for purchasing an EV.?It used to be $2,917 but was recently changed to $2,500.?The battery capacity for the base credit used to be 5 kilowatt hours (kWh), but under the new rules, there is no long a minimum battery capacity for the base credit.?The credit is then increased as the battery in the EV increases its capacity in 5 kWh increments and caps off at $7,500.

There has been a lot of focus on it recently because the US government decided to make some changes to the credit.?Starting on April 17, 2023, the US Government put additional restrictions on the EVs that qualify for the credit.?The new rule puts a price cap on the EVs that qualify as well as some restrictions on the parts that automakers can use on qualifying EVs.?

Additionally, the new rules put a cap on how much a taxpayer can earn and still qualify for the credit.?A lot of people are upset about these restrictions, for various reasons, but they aren’t necessarily as big a deal as some people believe they are.?Again, it depends on your specific situation.

The News Only Tells One Story

As I mentioned before, the article I referenced is a good example of news articles that contain misstatements or oversimplifications of tax law.?The article argues that people should lease EVs if they want to take advantage of the EV tax credit.?

The article states that with the new changes to the tax rules, you should lease an EV rather than purchase an EV.?He states that this is a "loophole" to the new rules that went into place on April 17th.?He may or may not be right, but again this is an oversimplification, and you should really talk to a tax professional before making a decision.?Let me show you why.

The Tax Credit Is for The Dealers

Under the author’s tax strategy, the title seems to imply that if you lease an EV, you can claim the EV credit.?To be fair, he does attempt to clarify this statement in his article, but this is simply not true.?The EV credit for leased cars is for the dealers, not the customer.?

If a taxpayer decides to lease an EV, it might be cheaper because of the EV tax credit, but it might not.?The customer cannot claim the credit.?The best you could do in this situation is hope the dealer passes on the savings they received from the tax credit to their customers by reducing their monthly lease payment.?

Again, this might be good for your specific situation.?The EV credit is much less restrictive for commercial vehicles and a wider range of vehicles qualify for the credit.?If you can negotiate a lower monthly payment, this might be a better option for you if you specifically want an EV that doesn’t qualify under the personal EV credit.

Additionally, you would not need to claim the credit yourself.?This could be an advantage if you don't want to worry about finding a car that meets EV credit qualifications.?You would also not need to worry about filling out paperwork to claim the credit on your personal return.?

The Made-in-America Rule

Then again, it might be better for you to simply purchase an EV and take the credit yourself.?As I said before, the new rules are getting a lot of attention, mostly because of the “Made in America” rule and the new caps on price and income.?The Made in America rule (actually called the Critical Mineral Requirement rule) simply states that a certain percentage of components used to make the EV batteries must have been made in America or in countries that have a free trade agreement with the United States.

Critics of this rule point out that this rule currently restricts the EV credit so much that only nine (9) EVs currently qualify for the credit. This is mostly because about 90% of battery components come from China, which doesn’t have a free trade agreement with the United States. If you were going to buy one of these nine EVs then there is no problem.?But what should you do if you want a different EV that doesn’t qualify??

You could lease as the author of the article suggests, or you could simply wait.?The thing about new rules is that they are new.?No one has had time to conform to the new rules just yet.?

If you do not want to lease and you don't want one of the nine qualifying EVs, simply wait until more EVs are produced that conform to the new rules, that's pretty much what happens with all tax regulations. But either way, you should talk to a tax professional before making your decision.

The Caps for The Credit

But what about the caps??Again, this might not be a big deal depending on your situation.?The author of the article is quick to point out that the caps will disqualify a lot of EVs and taxpayers from claiming the credit, but this may not be true.?

The price cap for purchasing a qualifying EV is now $55,000.?Meaning any EV that costs more, simply does not qualify for the credit.?At first glance, this would seem to disqualify a lot of EVs since the average price of EVs right now is $60,000-$65,000.?But you need to account for the outliers.

The Rivan R1T costs anywhere from $73,000-$94,000 and the Tesla Model S and X cost about $87,000-$107,000.?But the reality is that the majority of popular EVs right now cost around $27,000-$61,000.?You would still need to be careful when buying your EV, but the cap is much more reflective of the current market than you would think.

As for the income cap on the credit, it also wouldn't be a dealbreaker for most Americans.?The income cap for the EV credit is set at $150,000-$300,000 depending on your filing status.?In the United States, the average income is about $70,000 per year and the mean is about $31,000 per year.?You likely won't even reach the cap if you are like most Americans.

So why am I telling you this? Because I’m trying to make a point.?The article specifically says that the rules are too confusing so you should just lease your EV instead of buying one if you want to save money.?

Again, I’m not saying that is automatically false, but there is more to it than he is letting on.?If you were to simply take his advice at face value, you might make a tax decision that would be wrong for you.?That is why I always tell people that the news is a good place to start, but if you really want to understand what’s best for your situation, you should come talk to a licensed tax attorney such as myself.

If you would like help with your tax issue, please don’t hesitate to contact our office. Our knowledgeable staff has a great deal of experience and is ready to help.?It is the mission of The Law Office of Pietro Canestrelli to take the fear and stress out of dealing with tax authorities so that you can move on with your life.

We offer a free consultation, and we'll gladly discuss your case with you at your convenience. Contact us today to schedule an appointment.