Close Close
ThinkAdvisor
Parked electric cars at a charging station

Financial Planning > Tax Planning > IRS Updates

Buyers Can Get Up-Front Electric Vehicle Rebates in 2024

By John Manganaro

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • Taxpayers who bought a qualified clean vehicle last year can file for a sizable credit during the coming tax season.
  • A new rule means those purchasing vehicles this year can get the financial benefit up front as a rebate.
  • With the rebates and credits, there are income thresholds and price limitations to keep in mind.

A policy adopted by the Internal Revenue Service under the Inflation Reduction Act of 2022 means that people who bought new electric vehicles during 2023 are eligible for a tax credit as high as $7,500 when they file their taxes this year. Used electric car buyers, meanwhile, can qualify for up to $4,000 in tax breaks.

Taxpayers who qualify can claim the credit on tax returns filed ahead of April 15, while those who make such a purchase this year will benefit from a rule change allowing them to choose between claiming a nonrefundable credit on their tax returns in 2025 or transferring the credit to the dealer to lower the price of the car at the point of sale — effectively claiming their credit as an up-front rebate.

According to the IRS, the new rebate approach available this year will do away with taxpayers having to wait until the following year to claim the benefit on their tax returns, potentially making the credit more attractive at a time when the federal government and many states are aiming to incentivize cleaner transportation alternatives.

Taxpayers interested in learning about the clean vehicle credit can reference a newly updated FAQ document published in late December by the IRS. As the document details, the Inflation Reduction Act of 2022 made several important changes to the prior tax credits provided for qualified plug-in electric drive motor vehicles purchases, including adding “fuel cell vehicles” to the clean vehicle credit.

The law also added new credits for previously owned clean vehicles and for commercial clean vehicles.

Who Can Claim the Clean Vehicle Tax Credit

As the IRS spells out, taxpayers may not claim the credit if their modified adjusted gross income exceeds certain thresholds. This limitation is based on the lesser of their modified AGI for the year that the new clean vehicle was placed in service or for the preceding year.

The relevant modified AGI thresholds are as follows:

  • Married filing jointly or filing as a qualifying surviving spouse or a qualifying widow(er): $300,000.
  • Head of household: $225,000
  • All other taxpayers: $150,000

For these purposes, modified AGI is the amount from line 11 of Form 1040 plus “any amount on line 45 or line 50 of Form 2555, Foreign Earned Income,” as well as any amount excluded from gross income because it was received from sources in Puerto Rico or American Samoa.

If a partnership or an S corporation place a new clean vehicle in service and the new clean vehicle credit is claimed by individuals who are direct or indirect partners of that partnership or shareholders of that S corporation, the modified AGI thresholds apply to those partners or shareholders.

Price Limitations

The IRS FAQ also spells out the price limitations applying to the credit.

Specifically, the manufacturer’s suggested retail price for the new clean vehicle may not exceed the following amounts for the following vehicle types:

  • Vans: $80,000
  • Sport utility vehicles: $80,000
  • Pickup trucks: $80,000
  • All other vehicles: $55,000

If the MSRP exceeds the limitation for that specific vehicle type, that vehicle is not eligible for the new clean vehicle credit.

As noted by the IRS, the Department of Energy hosts a purchaser-friendly version of the list of eligible clean vehicles, including battery electric, plug-in hybrid and fuel cell vehicles that qualified manufacturers have indicated to the IRS meet the requirements to claim the new clean vehicle credit on FuelEconomy.gov, including the applicable MSRP limitation.

Income and Price Limitations for Used Clean Vehicles

As detailed in the FAQ, the clean vehicle credit is also available with the purchase of a used vehicle, but different income and price limitations apply. The relevant modified AGI thresholds are as follows, and they are calculated the same way as they are for new vehicles:

  • Married filing jointly or filing as a qualifying surviving spouse or a qualifying widow(er): $150,000
  • Head of household: $112,500.
  • All other filers: $75,000.

Claiming a Credit or Up-Front Rebate

According to the FAQ, starting for vehicles placed in service Jan. 1 or later, buyers will be able to claim credits only if the seller has registered with the IRS and successfully submits a seller report through the IRS Energy Credits Online portal. This submission is done at the time of sale through IRS Energy Credits Online, and the seller must provide a copy of the successfully submitted seller report to the buyer.

As the IRS stipulates, the transfer election allows a taxpayer purchasing a new clean vehicle or previously owned clean vehicle to transfer the entirety of the allowable credit to an eligible entity (a registered dealer) in exchange for a financial benefit (i.e., reduced final cost) from the eligible entity equal to the amount of the credit. This commensurate benefit can be offered in cash, in the form of a partial payment or a down payment for the purchase of such vehicle.

In short, the tax credit can be applied at the point of sale to reduce the cost of the purchase by the amount of the credit. Eligible taxpayers who purchase an eligible vehicle may still choose to claim the tax credit on their return instead of transferring a new or previously owned clean vehicle tax credit.

To claim the credit, taxpayers can file Form 8936 when they file their federal income taxes. The credit is nonrefundable, which means it can lower or eliminate tax liability, but taxpayers will not get any overage of the credit refunded once their liability reaches zero.

Credit: Adobe Stock

John Manganaro

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.