Drivers who would like to make the switch to electric can find a few different tax breaks to help them out. For people who lease, the best option comes via the Inflation Reduction Act. This law can give lessees access to a $7,500 tax credit for electric cars. While a similar credit exists for people who buy their vehicles, it can apply much more broadly to leased vehicles than to purchased ones. The only catch is that your dealer can decide whether or not to give you this tax break, so make sure it shows up in your contract. You may want to talk to a financial advisor to see how it impacts your finances directly.
What Is the EV Tax Credit?
In 2009, the Obama Administration introduced an electric vehicle tax credit designed to make the, often expensive, electric car market more affordable. That law gave drivers a base credit of $2,500 for purchasing an EV, with the potential for up to $5,000 more depending on factors like the car’s battery capacity.
In 2022, the Biden administration used the Inflation Adjustment Act (IAA) to modify this credit. Effective as of April 18, 2023, drivers who buy or lease a qualifying car can receive a flat tax credit worth $7,500. This is a non-refundable credit, meaning that it directly lowers your tax bill but cannot reduce that bill below zero.
The idea of the IAA was to expand access to EV credit in hopes of accelerating the switch from obsolete combustion engines. The problem, however, is that this bill also added several new conditions and exceptions that make accessing electric vehicle credit harder than ever.
The EV Credit Has Several Catches
Although advertised as an easy, flat credit for switching to clean energy, the reality is that the electric vehicle tax credit has many, many catches.
Few Purchased Vehicles Now Qualify
The IRA significantly narrowed the Obama-era tax credit when it comes to buying an electric car. Where the previous version of this tax credit applied broadly, the Inflation Reduction Act added strict Buy American rules to this market. New EV purchases cannot receive the full tax credit unless the car was assembled in North America and has a minimum percentage of parts from the United States or listed trading partners.
A qualifying vehicle must also have a maximum MSRP of $55,000 for cars or $80,000 for trucks and SUVs. Of the roughly 50 models of electric cars on the market at the time of writing, only nine meet this dual mandate and qualify for the updated tax credit.
The IRA also added income cutoffs to this tax credit. Taxpayers who make more than $150,000 or $300,000, depending on whether the taxpayer is single or filing jointly, do not qualify for a purchase credit. As with the maximum MSRP, this has created some tension with the law’s Buy American rules. Vehicles made in North America will generally cost more money and so will require higher-income customers, but those higher prices will likely disqualify either the car, its customer or both.
In General, Leased Vehicles Qualify
Happily, there’s a loophole. Neither the Buy American rule nor the income cap apply to leased vehicles. They are classified as commercial vehicles, which the IRA exempts from the tax credit restrictions in order to encourage commercial fleets to buy electricity. This means that you can receive the full $7,500 tax credit for leasing just about any electric car on the market, regardless of where it was made or how much you personally earn.
But there is still a catch. When you lease a car, the EV tax credit belongs to the dealership, not the customer. Since the dealer claims the tax credit, it can choose to apply that credit to the lease price for any electric vehicle. It doesn’t have to, however.
How Can You Claim the EV Tax Credit?
If you receive the EV tax credit for leasing a car, it will come as part of your transaction with the dealership. You will not claim this credit on your taxes. Instead, the dealer will pass the credit along to you in the form of lower prices. Typically a dealer that does so will either amortize the tax credit across your payments or they will omit some monthly payments entirely. This will come to either $7,500 in savings (for most cars) or $3,750 (for a handful of vehicles that qualify for partial credits).
It’s important to understand that the dealer is not required to do this though. To claim the leased tax credit, you need to make sure you negotiate for it. Check to see that it’s in your contract. If not, ask the dealer for it. If they refuse, consider leasing your car elsewhere. Many dealers are passing this tax credit along to their lessees, so you have a comfortable room to walk away from here.
If your dealer does include the tax credit in the lease, you don’t need to do anything else. Unlike the purchased vehicle tax credit, you won’t need to wait for tax season to receive this money. You will typically see it immediately in the form of lower prices or an up-front incentive.
The Inflation Reduction Act has changed the marketplace for electric vehicles, tilting tax credits in favor of leasing. While that may change over time, right now a little bit of shopping around can save you a lot of money on a leased car.
Leased electric vehicles are eligible for a $7,500 tax credit. While you may have to shop around, many dealers will pass that credit on to their customers in the form of lower prices. This is something that you’ll want to make sure you pay attention to during the car-buying process so that you can make the most of the opportunity. You can work with a professional to discuss how your personal taxes may be impacted.
Electric Car Buying Tips
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- There are still several technical and logistical hurdles when it comes to buying an electric car. If you’re interested in this market, it would help to start by looking at the cities where buying electric can make the most sense.
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