Federal Incentive for EV Purchase or Lease

Federal Incentive

Disclaimers:

We are not CPAs. It is always a good idea to check the foregoing with your accountant. This is for general informational purposes only.

Incentive levels and rules change all the time. This page was last updated on Feb 29, 2024. We keep up as best we can. If you see anything here that you think needs to be updated or corrected, please let us know, either via the website contact form or emailing us at info@evclubct.com.

The incentive landscape has become complicated enough that we have not broken it into multiple pages. This page describes federal incentives for purchasing or leasing an EV that were enacted as part of the Inflation Reduction Act. This is the page for State of CT EV purchase incentives. Here is where to find incentives for purchase and installation of EV chargers and incentives for off-peak charging from Eversource and United Illuminating. Some of the smaller, municipal utilities also offer incentives.

Dealer Registration

The Department of the Treasury has now launched its dealer registration portal. Consumers can only get the incentive, whether they use the transfer provision or not, if the dealer has registered with the treasury. Dealers who have registered must provide a seller report to the consumer at the time of delivery to be filed at tax time.

At this time, it is reported that roughly half of new car dealerships and a very small percent of used car dealerships have registered and been approved by Treasury.

August 16th, 2022 – Inflation Reduction Act signed by President Biden.

This bill extensively revises the federal EV tax incentives. The foregoing describes the incentive in as much detail as is available. There is still rule making that has to occur that could have an impact on vehicle eligibility.

• The North American final assembly rule went into effect upon enactment in August.
• The new program began in January 2023.
• The provisions of the IRA are in effect for 10 years.
• Latest Update 4/21/23 – IRS releases battery guidelines on 3/31 which took effect April 18th. The new list of incentive-eligible vehicles is available on the DOE website. Bear in mind that this list will be continuously changing. Mostly, this will be due to new vehicles becoming eligible, but it is possible that vehicles can lose eligibility.

New EV Incentive

• Tax credit of up to $7500 for new EVs.
  • A minimum percentage of critical battery minerals must be sourced in countries with which the USA has a free trade agreement (50% of the incentive).
  • A minimum percentage of battery assembly must be in North America (50% of incentive).
  • Beginning in 2025, cars with any battery minerals sourced from an entity of concern (e.g. China, Russia) are excluded.
• North American final assembly required.
• Removal of manufacture unit cap for new cars. Prior to January 1, 2023, when a manufacturer sold 200,000 units, they phased out of the incentive. This change would enable Tesla and General Motors to again be eligible. Toyota, Ford, Nissan, and Hyundai have either crossed or are close to crossing the 200,000 threshold but that becomes moot with the IRA, assuming compliance with the other rules (Toyota and Hyundai are not currently building EVs in North America).
• MSRP cap
  • $80,000 for trucks, vans, and SUVs. (Please note: The IRS is now using consumer-facing EPA categories. This represents a change for the better.)
  • $55,000 for sedans.
  • MSRP is being defined as the manufacturer’s suggested retail price including factory installed options (but not dealer options, surcharges or discounts, destination fees, taxes). This price may be different than what you pay.
  • Software (e.g. Tesla FSD) is not included in MSRP cap.
• Income cap – Recipients of the tax credit cannot have a modified adjusted gross income over $300,000 for joint filers (including surviving spouses), $225,000 for a head of household filer, and $150,000 for an individual filer. This applies to consumer purchases only (i.e. not leases and not commercial purchases).
  • Pass-through entities, such as a single person LLC or Subchapter S Corporation are treated as consumers.
• Minimum battery pack requirement has been increased to 7 kWh, still very small. We can’t think of any PHEV with a battery pack size of <7 kWh.
• Unlike the prior regime, the size of the battery pack does not figure into the incentive. A PHEV would, therefore, get the same incentive as a BEV.
• Both purchased and leased vehicles are eligible for the incentive. As is the case now, a lease is a way of getting the full incentive if one does not have the tax liability to absorb the tax credit. The incentive goes to the title-holder. It is up to the buyer to press the seller to ensure there is adequate transparency and that the incentive is incorporated into the calculation of lease payments. As of 2024, the transfer, described below, is a new option to get the full benefit of the rebate.

Eligibility Determination

• From the beginning, the IRS has said that they will be tracking eligibility at the VIN level. This is a VIN decoder from NHTSA.gov. A shortcoming of the incentive is that a VIN isn’t available until late in the buying process. That said, the IRS seems to be providing the manufacturers some wiggle room, including allowing them to self-certify. This should give more of a comfort level to consumers.

Leasing

• Per IRS guidance issued on 12/29/22, leased vehicles are classified as commercial transactions (section 45W) and not subject to all of these rules described above. Many manufacturers that are not eligible for the credit, particularly those who have not yet built out a North American manufacturing base (e.g. Hyundai) are aggressively pushing leases. There have been reports that the rate of leasing transactions as a percentage of EV sales may as much as triple.
• A manufacturer (or their finance arm) is not legally obligated to pass along the incentive. Consumers should seek transparency with the seller.

Used EV Incentive

• Used EV tax credit of the lesser of $4000 or 30% of the vehicle cost with max price of $25,000.
• Vehicle model year must be at least 2 years older than the current calendar year and must be first resale of the vehicle.
• An individual can take the used EV incentive no more than once every 3 years.
• Used vehicle incentive only available through dealers (new and used car dealers), not via private sale.
• Only one incentive is permitted per vehicle.
• Battery sourcing and assembly requirements do not apply for used vehicles.
• Minimum battery pack size of 7kWh (quite small).
• Income caps for used EV incentive – $150,000 (joint filers or surviving spouse/$112,500 for head of house filers/$75,000 for single filers.
• Vehicles must be bought through a CT dealer.
• This page on the IRS website lists eligible vehicles.

Transfer Option – Beginning in 2024

• Beginning in 2024, the tax credit, at the buyer’s option, can be transferred to a participating dealer/manufacturer. As noted, the dealer has to be registered with the Secretary of the Treasury to be able to accept the transfer. The customer then receives the funds immediately as a rebate. This is true for used EVs, as well. The seller must file a seller’s to Treasury. The buyer must report the VIN and file the seller’s report when filing federal taxes. Treasury reports they are reimbursing dealerships within 72 hours.
• Dealer must disclose amount of rebate to consumer and provide the full value of the rebate with a transfer. (This rule does not apply to a lease, hence the advisement above about obtaining transparency.)

Other Rules

• Income eligibility for new or used EVs is based on the current or prior tax year if you are taking the tax credit (whichever is lower).
• If a consumer represents that they are income-eligible and receives a transfer incentive, but at tax filing time this turns out not to be the case, then the consumer must repay the incentive to the IRS.
• Neither the income nor MSRP caps are indexed for inflation during the duration of the bill.
• Incentives are available for commercial vehicles without the above restrictions. There are other rules around commercial vehicles that aren’t addressed in this article.
• Light duty vehicles are defined as 4-wheeled vehicles certified to travel on public roads and weighing less than 14,000 pounds.
• 2 and 3 wheeled EVs and E-bikes are not eligible.

How Battery Requirements Will Scale

This is how the battery requirements will be scaling up. The percentages noted are based on value. The technical questions around how value is defined and quantified is what is going on behind the scenes at the IRS. This is not something that the IRS is intrinsically equipped to handle and that is why they are in need of extra time.

• Critical Mineral Sourcing and Refining (percentage that must come from North America or from a country with which the USA has a free trade agreement)
  • 2023 – 40%
  • 2024 – 50%
  • 2025 – 60%
  • 2026 – 70%
  • 2027+ – 80%
• Battery Assembly (percentage of battery components that must be manufactured/assembled in North America)
  • 2023 – 50%
  • 2024 – 60%
  • 2025 – 60%
  • 2026 – 70%
  • 2027 – 80%
  • 2028 – 90%
  • 2029+ – 100%

First Quarter 2023 – Partial Implementation

The IRS has not finished rule-making regarding the battery incentives and announced a 3-month delay. That means that the old rules about battery pack size continue for now. Any BEV meets the battery pack size requirement for the full incentive. Below is the current incentive formula based on battery pack size.

• $2,917 for a vehicle with a battery capacity of at least 5 kilowatt hours (kWh)
• Plus $417 for each kWh of capacity over 5 kWh

The IRS certification list will continually be revised as manufacturer documentation for vehicles is approved. Just because a vehicle appears on the list does not mean it is eligible for an incentive. It still must fall within the MSRP cap that is noted next to the vehicle. Many don’t. The battery pack size rule does affect many of the PHEVs. Those affected vehicles qualify for a smaller incentive.

For those who want to take advantage of the higher tax credit prior to the battery rules implementation, Treasury advises that the purchaser must be in physical possession of the vehicle before the rules are in force.

The income restrictions are now in force.

The manufacturer cap is gone.

The MSRP caps are now in force.

The North American final assembly rule has been in force since August 16th.

Federal Tax Credit for the Remainder of 2022 (keeping this around through tax filing season)

The current program remains in place for the remainder of 2022, except, as noted above, with an added requirement that final assembly occur in North America for vehicles that were delivered after August 16th. Vehicles delivered after August 16th which had a binding contract in place by that date are exempted from the North American final assembly requirement.

The Federal government offers a maximum incentive of $7,500 in the form of a tax credit which reduces the total amount of income tax you owe.  This is a dollar-for-dollar tax credit – not a tax deduction. For example, if you owe $15,000 in Federal income taxes, your tax liability would be reduced to $7,500 ($15,000 – $7,500). When we exhibit at EV showcases, we find there is still confusion on this point.

This assumes you owe at least $7,500 in federal income tax (over and above FICA).  If your tax liability is less than $7,500 you receive a tax credit to a maximum of your tax liability.  Therefore, if your Federal tax liability is $5,000 then your maximum incentive is $5,000. You will not receive a refund for the balance, nor is there a carry-forward.

You do not have to itemize your tax deductions to be able to use a tax credit.

There is a requirement that the EV has a battery pack that is a minimum of 5kWh (very small). The $7,500 is a maximum credit. Cars with smaller battery packs will receive a smaller credit. This links to the US Department of Energy website that has a list of which vehicles qualify for which level of credit.

For leased vehicles, the incentive goes to the title-holder. The dealer has some discretion here. It usually gets passed in whole or in part to the consumer. Ask the dealer to review the math of the lease. This has no bearing on tax filing.

There is a cap of 200,000 vehicles sold per manufacturer. At that point, a phaseout period begins.

After the 200,000 vehicle threshold is reached, the full benefit remains for the remainder of the quarter and the subsequent quarter relative to when the threshold was crossed.  The maximum benefit is reduced by half ($3750) for the following six months and reduced by half again ($1875) for the six months following the initial reduction. Then it expires.

For example, Tesla, the first manufacturer to cross the threshold, did so in July 2018. The full credit remained through December 2018. The credit was halved ($3750) from January 2019 through June 2019.  It was halved again ($1875) from July through December 2019. As of January 1, 2020, the tax credit for Tesla expired. If a vehicle is eligible for a lower amount than the max $7500, the same ratio of decline applies. Similarly, incentives for GM vehicles expired on March 31, 2020.

Just to be clear: If you bought an eligible EV (i.e. not Tesla or GM, for which eligibility had expired) that was not assembled in North America, but you bought it before August 16th or had a signed contract in place by that time if the car had not been delivered, you can claim the tax credit when you file your 2022 income taxes. From August 16th through the end of 2022, vehicles assembled in North America are eligible for the incentive.

Other rules

This tax credit is associated with the car and not the person. In other words, it can be used for as many eligible new EVs you buy as long as it is in effect. For used EVs, the incentive may be taken no more than once every 3 years. This is different than how the state incentive works.