Electric car buyers have new options in 2024 to make it easier to purchase a new electric vehicle (EV) by using the federal EV tax credit. While the tax credit has been around for a while in various forms, the Inflation Reduction Act made substantial changes to the tax credit, with modifications to who is eligible to take the credit, new requirements on EV models, and also new ways for buyers to access the credit. A number of these changes will increase the availability and usefulness of the credit, from now through 2032, such as the removal of the cap on the number of tax credits available. One big addition this year is the ability to transfer the EV tax credit to a dealership (or manufacturer for direct-to-consumer auto companies). This means income-eligible buyers will receive the incentive at time of purchase, rather than waiting until the spring of the following year for a tax refund, potentially reducing the down payment or amount financed.
The transfer of the tax credit to a dealer can also have benefits for buyers that have a total federal tax liability less than the maximum $7,500 EV credit. When the credit is taken on the personal income tax return, it’s non-refundable so EV buyers with less than $7,500 in federal taxes effectively lose a portion of the EV credit. However, when transferred to a dealer, the full value of the credit is realized, regardless of personal tax liability. One important change in the administration of the tax credit is the requirement for 2024 is that dealers need to be registered with the IRS and report qualifying sales within 3 days. Already over 11,000 dealers have signed up, so many buyers will have access to the credits, but it will be important for purchasers to make sure they receive the required documentation of the sale, regardless of if the credit is transferred or if they are taking the credit on their personal income tax return.
There is also a separate tax credit for used EVs to make EVs more accessible to moderate and low-income consumers, and that credit of up to $4,000 is also now transferable. However, there are requirements on the vehicles that are eligible, as well as lower income limits for buyers. Used EVs need to be sold by a dealer, cost less than $25,000 and not have previously transferred to a qualified buyer, so not all used EVs will qualify. Even with these restrictions, the used car tax credit will help make switching from gasoline to electricity easier for more US car buyers.
For new EVs, there are also new restrictions on the manufacturing that means buyers will need to check the official list at fueleconomy.gov to see if the EV they are considering may qualify. Recent additions to the list include the Volkswagen ID4, Honda Prologue, Cadillac Lyriq, and versions of the Tesla Model Y. As automakers build more domestic manufacturing, we should see more models become eligible soon. General Motors has indicated that several more EV models will be added to the eligible list this year while eligible Hyundai and Kia EV models are expected later this year.
Switching from gasoline to electricity is one of the most important steps we can take to reduce climate change. And incentives like the new and used EV tax credits are improving access to EVs by bringing down the upfront cost for buyers. These credits will help with more widespread EV adoption now, and because they are available through 2032, will provide a longer-term boost to clean transportation too.