What has changed?
If you remember my last newsletter about electric vehicle credits (you do not), then you remember these basic things about claiming the credit for non-business electric vehicles:
There are income limits ($300,000 for married couples, $225,000 for heads of households, and $150,000 singles & ready to mingles).
The credit would save you $7,500 in taxes assuming you have AT LEAST $7,500 in tax liability.
The vehicle must cost less than $55,000 MSRP ($80,000 for vans, SUV’s, and pickup trucks).
Vehicles have to meet certain manufacturing requirements, and a list of qualifying vehicles can be found here.
You claim the credit on your tax return (well after the original purchase) by filing form 8936 and reducing your tax liability.
However, now some things have changed due to recent IRS guidance in order to make the rules more in line with the intentions of the bill that was passed (The Inflation Reduction Act). There are two main changes to note with this IRS guidance.
The first is that the credit can now be claimed at the time of purchase by agreeing to transfer the credit to the dealership. In other words, the dealership can give you a $7,500 credit at the time of sale, which would behave like a down-payment on the vehicle. The dealership would then deal with the paperwork for claiming the credit on their end. This allows consumers to get access to the funds from the credit immediately, rather than having to wait for tax time to claim it.
The other possibly more significant change is that taxpayers will no longer be limited by tax liability when claiming the credit. For example, in order to claim the full $7,500 credit, I would have to have at least $7,500 in tax liability. That doesn’t mean I have to owe $7,500 at the end of the year, but my calculated total tax has to be at least that much to get the full benefit of the credit. If I’m single, that means I have to have at least $69,000 in ordinary income to receive the full benefit of the credit. If I’m married, the total ordinary household income would have to be $93,000 or more to get the full benefit. If I have less than that, my total tax calculation will be less than $7,500. I’ll still be able to eliminate my entire tax liability, but it essentially feels like leaving money on the table just because my income isn’t high enough. It effectively put an income floor on receiving the full benefit of the credit, which is not really what congress intended with this bill.
These changes don’t take effect until 2024, so don’t run to the dealership now to try to take advantage of this. If you purchase an EV in 2023, you’ll still have to claim the credit on your tax return when we file in 2024.
What could go wrong?
A couple of things. Here’s how this is supposed to work logistically. When you purchase the car, you give the dealership your information (social security number, name, address, etc.). The dealership the reports the VIN number of the vehicle you purchased and the associated purchaser information (your social) to the IRS. When you’re filling out the paperwork for this credit transfer, you also have to certify that you qualify, basically stating that you’re under the income thresholds. The dealership is not required to verify this information, so they will rely on your knowledge of your own income. See where a problem might arise?
Let’s say I get paid a salary of $140,000. I also have some investment income each year from some stocks I invest in. I reinvest the dividends I receive from these stocks, so I don’t really think of that as income. However, on my tax return, it is most certainly income and will reduce or eliminate my eligibility for the credit by putting me over the $150,000 income threshold. When the IRS gets my tax return, they’re going to send me a letter asking me to repay $7,500 of EV credits that I claimed from dealerships. This will certainly happen to a number of people, and it will be an unfortunate surprise. However, the good news is that you can use either your current year income (which will be 2024) or your prior year income (which will be 2023). You’ll at least know what your income was in 2023 if you’re purchasing one in 2024, so you can guarantee eligibility if your 2023 income was under the thresholds.
There is one other problem that I see potentially arising from the way this is structured. Ever been asked, “what would it take to get you in this car today? How about an extra $7,500? Would that do the trick? Great – all you have to do is certify that you qualify for this tax credit and I’ll give it to you right now.” It won’t happen everywhere, but it WILL happen somewhere. Buyers could likely be taken advantage of by pushy salespeople and later find out they were mislead and do not qualify, forcing them to repay the credit at tax time. The hope is that the certification form will be straightforward enough to allow buyers to realize what they’re certifying to, but there are a lot of papers to sign and things can move quickly.
Anyway, this is a good thing for EV buyers. It’s a great way to get the money in your pocket faster, rather than having to wait for me to finish your taxes and claim the refund.