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Beginning in January, eligible buyers of electric vehicles can now receive a federal tax credit as an upfront discount directly at the dealership. This new guidance from the U.S. Treasury Department aims to make savings more immediate, eliminating the need for buyers to claim EV credits after the fact on their tax returns.
This change builds upon the Inflation Reduction Act, a package of green incentives passed by Congress in 2022, and is part of the larger federal effort to accelerate the transition to electric vehicles. The White House has set a target for 50% of new vehicles to be electric by 2030. Laurel Blatchford, Chief Implementation Officer for the Inflation Reduction Act at the Treasury Department, stated, “For the first time, the Inflation Reduction Act allows consumers to reduce the up-front cost of a clean vehicle, expanding consumer choices and helping car dealers expand their businesses. The IRS has focused on streamlining this process for car dealers as part of its commitment to improving service and helping taxpayers claim the credits they are eligible for.”
The Inflation Reduction Act, enacted in August 2022, provides credits of up to $7,500 for new clean vehicles and up to $4,000 for pre-owned vehicles, with certain requirements for both the buyers and the vehicles. Married couples with modified adjusted gross income (MAGI) up to $300,000 and single filers with MAGI up to $150,000 are eligible for the new vehicle credits. The income cutoffs for used EV credits are half those amounts—$150,000 for married couples and $75,000 for single filers.
Buyers must confirm their eligibility for the discount at the dealership by either meeting the income limits in the prior year or believing they will meet the limit in the year of purchase. If it is later determined that they were not eligible, they would be responsible for repaying the credit, not the dealer.
In order to qualify for the full credit, eligible new vehicles must undergo final assembly in North America and cannot exceed $80,000 in cost for vans, SUVs, and pick-up trucks, or $55,000 for any other new vehicle. New electric cars must meet both battery and critical mineral requirements, with at least 50% of battery components manufactured or assembled in North America. Vehicles meeting either of these requirements qualify for a $3,750 credit.
According to Consumer Reports, the Tesla Model 3, Ford F-150 Lightning, and Chevrolet Bolt are among the vehicles eligible for the full federal tax credit. In the second quarter, Teslas followed by Chevrolets were the most popular choices for electric vehicles, with nearly 300,000 new electric vehicles being sold. Over 800,000 electric vehicles have been sold so far this year, according to Cox Automotive.
Used EVs have no domestic manufacturing requirements but must not exceed $25,000 in cost. The tax credit for used EVs equals 30% of the sale price, up to a maximum credit of $4,000. Congress designed both the used car credit and the point-of-sale discount to make EV purchases more affordable upfront. While electric vehicles may be less expensive to operate over their lifetimes, they generally have higher upfront costs. According to July data from Cox Automotive, the average electric car costs $53,469 compared to $48,334 for gas-powered cars.
The provision for the point-of-sale discount was driven by research from George Washington University, which concluded that immediate rebates are the most valued incentive design compared to tax credits, deductions, and sales tax exemptions. Notably, the Inflation Reduction Act doesn’t include incentives for e-bikes, but state and local governments have been filling that gap by offering point-of-sale rebates.
To be eligible for the federal tax credit, buyers must purchase from a dealer registered with Energy Credits Online, a new IRS website. Once the sale is documented by the dealer, the IRS will reimburse the funds within 72 hours. The Treasury Department designed this new policy to support dealers in growing their businesses. Mike Stanton, president and CEO of the National Automobile Dealer Association, commented that the new requirements align with the priorities NADA emphasized to the Treasury for successful implementation of the clean vehicle tax credit program.
In addition to the federal credit, several states, including Colorado, Vermont, and New Jersey, provide additional incentives for electric vehicle purchases. Despite their higher sticker prices compared to gas-powered cars, electric vehicles can provide more savings over their lifetime. According to Consumer Reports, electric vehicles can save a typical driver $6,000 to $12,000 and cost 60% less to power compared to gas cars.
For more information, you can read the full IRS guidance here.
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