To promote electric vehicle (EV) sales and make them more affordable for consumers, the Department of the Treasury and the IRS have proposed new rules that could change the dynamics of EV purchases. The proposal seeks to offer immediate tax benefits to EV buyers at the point of sale, starting January 1, 2024. 

A shift in EV tax credit dynamics

In 2024, eligible consumers can transfer their clean vehicle tax credit to the car dealer, who will then reduce the vehicle’s purchase price by the tax credit amount. Dealers will have to provide buyers with written confirmation of the vehicle’s eligibility and the amount of the credit. The IRS is expected to issue payments back to the dealers within 72 hours after the sale, thus ensuring a seamless transaction. 

For purchases before 2024, buyers must wait until they file their annual tax return to receive the credit’s financial benefit, which could be a year or longer after the purchase. However, under the new guidelines, all eligible EV buyers could get an upfront discount of up to $7,500 for new cars and $4,000 for used vehicles. 

The total value of the tax credit will vary based on multiple factors, such as whether the vehicle meets the critical minerals and battery sourcing requirements. For instance, a new vehicle meeting only one of these sourcing requirements will only be eligible for a credit of $3,750. 

Furthermore, the tax credit is nonrefundable, meaning that buyers with a smaller tax liability may not be able to benefit from the full credit when claiming it on their tax return. Under the new guidelines, all eligible buyers, regardless of their federal tax liability, stand to gain from the credit as it will reduce the cost of the vehicle at the point of sale. 

Requirements

The proposal comes with certain caveats. For one, it is subject to a 60-day public comment period ending in December, and while experts don’t foresee any substantial revisions, changes could be made in the final version. Moreover, not all dealers may participate in the program. To offer consumers clean vehicle tax credits, dealers must register for the program.

Additionally, buyers must file an income tax return for the year the vehicle transfer election is made. They also bear the responsibility of attesting their eligibility for the credit, as car dealers will not be expected to analyze a buyer’s income to determine if they qualify. Instead, buyers can self-attest their eligibility based on their prior year’s income. 

Buyers who fail to meet the eligibility criteria could be required to pay back the full value of the tax credit to the IRS. 

Income eligibility

For the new vehicle tax credit: 

• Married couples filing a joint tax return have a MAGI limit of $300,000
• Heads of household are capped at a MAGI of $225,000
• Single tax filers have a MAGI limit of $150,000

For the used vehicle credit: 

• Married couples filing jointly must have a MAGI of $150,000 or less
• Heads of household cannot exceed a MAGI of $112,500
• Single tax filers are capped at a MAGI of $75,000

The proposed rule change aims to incentivize more consumers to purchase electric vehicles by making them more affordable and accessible. These changes will allow immediate financial benefits at the point of sale and expand the pool of eligible consumers. However, these benefits are tethered to certain conditions. As these regulations evolve, staying informed and ensuring compliance with the changing rules is vital. 

This article is intended to provide a brief overview of upcoming changes to the EV tax credit. It is not a substitute for speaking with an expert advisor. For more information, please get in touch with our office.