New EV Tax Credit Rules Help Low-Income Consumers
Starting on January 1st, eligible consumers who purchase a qualified electric vehicle will be able to collect their federal tax credit at the point of sale. The current rules require taxpayers to apply for the credit when they file their taxes and then wait to receive the benefit. The new “cash-on-the-hood” option is likely to increase the effectiveness of the incentive by offsetting the purchase price of an EV immediately. The streamlined procedure will be especially helpful to low-income consumers who have difficulty managing the high up front cost of an EV. The changes coming in 2024 will also grant full eligibility to low-income taxpayers who currently lose out on part or all of the incentive because of insufficient tax liability.
The Inflation Reduction Act made many complex changes to the EV tax credit rules that restrict its availability, so the arrival of the straightforward cash-on-the-hood provision will be a welcome development. Many new EV models will only qualify for half of the $7,500 credit, and there is now another complicated credit for used EVs that can save an eligible consumer up to $4,000. Income caps are now in place denying the credits to wealthy taxpayers, and the short list of qualified EV models is always subject to change. Making the confusing tax credits available at the point of sale will help assure consumers that they will not end up receiving a smaller tax credit than they expect. The eligibility of the EV model and the precise value of the credit will be firmly established when the terms of sale are negotiated at the dealership.
Consumers who elect to receive the incentive up front will still have to report it on their tax return using form 8936, and the Internal Revenue Service will recoup the money if the buyer’s income ends up exceeding the cap. In order to qualify, a taxpayer’s modified adjusted gross income must fall below the applicable threshold during the tax year that the EV is delivered, or during the previous tax year. For new EVs, the caps are $300,000 for married couples filing jointly, $225,000 for heads of households, and $150,000 for all other filers. For pre-owned EVs, the income thresholds are 50% lower.
Recent guidance from the IRS confirms that the cash-on-the-hood provision will allow taxpayers with little or no tax liability to take full advantage of the incentive, which has always been a nonrefundable tax credit that cannot exceed the amount of taxes owed to the federal government. If, for instance, a low-income buyer purchased an EV model that was eligible for the full $7,500 credit, but only owed Uncle Sam $2,000 in taxes that year, the credit would only be worth $2,000 and its remaining value could not be rolled over to the following tax year. A taxpayer with no tax liability would not be able to take advantage of the incentive at all. The stingy policy has been heavily criticized for denying the benefit to folks who need it the most, and the new accounting procedure will eliminate the inequity. The IRS has indicated that it does not intend to recapture the value of the credit from taxpayers who elect to receive it at the point of sale but end up having insufficient tax liability to qualify for it when they file their taxes.
Cash-on-the-hood will be especially rewarding to folks who need help making a down payment, but should also enhance the incentive for a wide range of prospective EV buyers. A bird in the hand is worth two in the bush, and most consumers are expected to take their EV tax credit up front when the opportunity becomes available in 2024.