Federal Rules for EV Tax Credits Remain the Same – The Mercury News

President Joe Biden’s ambitious “Build Back Better” plan included new rules governing the federal tax credits designed to accelerate the sale of electric vehicles. That enormous legislative package failed to pass the Senate, leaving the existing tax rules in place. If you are considering purchasing an electric vehicle, it is important that you understand the basic details of the current incentives, which can lower the price of a new EV by as much as $7,500.

The first thing you need to know is that you will only collect the full tax credit if you have $7,500 of tax liability in the year that you purchase the EV. The incentive is a valuable tax credit, not just a deduction, but Uncle Sam will not offer any portion of the credit beyond what a taxpayer owes the government. If, for instance, you only owed $5,200 in federal taxes, the EV tax credit would only be worth $5,200, lowering your tax liability to zero for that year. Uncle Sam would keep the remaining $2,300, which could not be rolled over to lower your tax bill the following year.

Critics of the current rules point out that the EV incentives tend to direct the money to wealthier households. Many individuals with low to moderate incomes do not generate $7,500 of annual tax liability, and they miss out on a portion of the EV incentive. Wealthier individuals are also in a better position to wait until tax time after purchasing an EV to collect their tax credit. Efforts to reform the incentives included new provisions to make them fully available to folks with lower incomes, and to provide them as “cash-on-the hood” rebates at the time of purchase.

If you want to take full advantage of the current tax incentives but don’t have enough income to generate $7,500 of tax liability, one option is to lease an EV rather than purchase it. In this case, the full value of the tax credit goes to the dealership, and they will often be willing to incorporate the savings into the terms of the lease, lowering your monthly lease payments accordingly.

Another thing you need to be aware of is that some of the most desirable EVs are not eligible for the tax credit at all. The incentives were designed to help automakers scale up the production and sale of their most environmentally beneficial vehicles, but they phase out quickly once an automaker has sold 200,000 qualifying vehicles. Sadly, both Tesla and General Motors have already reached the limit. If you purchase one of their outstanding EVs, you will not be able to take advantage of the credit. Toyota is now very close to reaching the limit, and Ford and Nissan are expected to exceed the cap within a year or so. The Environmental Protection Agency’s fueleconomy.gov website is a great resource for finding out which EV models remain eligible for the full $7,500 credit.

The Build Back Better plan envisioned reforming the current EV model eligibility rules, but nothing is likely to change soon. There are still plenty of excellent EVs that qualify for the incentives. You might want to hurry if you’re serious about purchasing a model manufactured by Toyota, Ford, or Nissan.

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