Are you planning to purchase an EV in 2024? Here are 7 things you need to know:

TL;DR: Consumers have the option of transferring their $7500 EV tax credit to the dealer at the time of purchase. Informally known as “Cash on the Hood,” these incentives can be a powerful stimulus in getting the car-buying public behind the wheel of an EV.

Unfortunately, the rules surrounding this new option have changed significantly in the last few months causing confusion and out-right misinformation. There are three must know points:

1. Buy from a qualified dealer and get the sales report before taking delivery

2. Buy a qualified vehicle, and ensure you meet the MSRP requirements

3. Careful not to make too much money the year you take possession

As they say, the devil is in the details.  We go straight to the source documents -- the IRS code -- and untangle it all.

Details of the Tax Credit Changes in 2024

Consumers are rightfully giddy at the prospect of using their $7500 tax credit as “cash on the hood” for the purchase of a new car.  For starters, it reduces (or eliminates) the need for a down payment when financing. Equally compelling is that it eliminates the wait to realize the credit from what could be more than a year from the point of sale, as compared to previous years.

Occasionally the IRS gets it right: Consumers have had the ability to take advantage of a $7500 EV tax credit for over a decade. But the old implementation had two distinct disadvantages.  First, you had to wait a year or more to file your taxes to get the credit.  Second, if you didn’t have a $7500 tax liability, you couldn’t take full advantage of the credit. As part of the Inflation Reduction Act, signed into law in August 2022, Congress allowed for the $7500 tax credit to be realized at the point of sale, but questions remained on how it would actually be implemented. Industry watchers finally got their answer when the IRS published their new rules on October 6, 2023. 

Everything below applies to EVs purchased by US taxpayers starting in January 2024.  

The first thing you should know - Buy from a registered dealer

You must buy your EV from a dealer that is registered to process the IRS tax credit.  When you buy your new (or used -- more on this in a bit) EV from a registered dealer, the dealer is required to provide the buyer at the time of sale a seller’s report that carries the penalty of perjury if there is intentional false information.  This report will have a bunch of information, but mostly you will file this report when you do your taxes.  

The dealer is motivated to get this report correct because the IRS pledges to pay the dealer the credit within 72 hours of the report being filed after the sale.

Dealers must apply to this program with the IRS and be accepted before they can start selling cars to the public under the guidelines of the program.  It is a safe bet that manufacturers who use direct sales (Tesla and Rivian) will be all over this.  More traditional franchise dealers will have to apply individually.  As a consumer, what you need to know is that you must purchase the EV through a registered dealer.  And do not take possession of the car until you get that seller’s report.

The second thing you should know - Not every EV is eligible

Not every EV qualifies. Even EVs that qualify won’t qualify.

The best way to find out if an EV you are considering qualifies for the federal tax credit is to see if it is on this list. While being on that list is a necessary condition, it is also an insufficient condition.  Each specific car must be validated by VIN to ensure that it qualifies.  This is due to the rather complex conditions of the IRA rules regarding the credit.

There is an evolving list of requirements an EV must make to be eligible for the credit, including MSRP limits, amount of North American sourced battery manufacture, final assembly in North America and so forth.  But most important is that even if an EV meets all these requirements, it still is not going to get the tax credit unless the manufacturer certifies it meets all the requirements.  And the easiest way to see if the manufacturer has certified the EV is checking to see if it is on the IRS’s list at fueleconomy.gov. As one example, some Model 3s may be eligible for the credit and some may not be simply due to the source of the cells within the car’s battery.

But wait, there’s more!  The EV’s MSRP plus factory installed options must also be less than a specified amount.  For trucks, that amount is $80,000.  Take the case of Rivian’s R1S.  The MSRP is $78,000 and as such, it qualifies for the EV tax credit, and you can verify it is included in the IRS’s list of qualified vehicles at fueleconomy.gov. But if you are tempted by any of the options, like larger batteries or even just premium paint, you’re going to be over the MSRP and not eligible for the credit. The MSRP must not exceed the limit ($55k for cars, $80k for trucks and SUVs) and that includes all factory installed options, but does not include dealer installed options, fees, taxes and so forth. 

For these reasons, it is important to check by VIN at fueleconomy.gov to ensure that a specific car is eligible.

As of January 1st, the list of eligible new EVs and PHEVs that qualify for the Clean Vehicle Credit have been reduced to 13. It’s important to note that some of these vehicles only qualify for half of the credit, while others qualify for the whole amount. Half credit vehicles are indicated. As a reminder, other factors will determine if you qualify for the credit, beyond just the right vehicle found here:

• Ford F-150 Lightning (extended and standard-battery versions under $80,000)

• Chevy Bolt (soon to be discontinued)

• Chevy Bolt EUV (soon to be discontinued)

• Tesla Model 3 (Performance only)

• Tesla Model Y

• Tesla Model X (Long range only, optioned below $80,000)

• Chrysler Pacifica Plug In Hybrid

• Rivian R1S (Dual large and quad large versions under $80,000; $3,750 max credit)

• Rivian R1T (The dual-large, dual-max, and quad-large versions under $80,000; $3,750 max credit)

• Ford Escape Plug In Hybrid ($3,750 max credit)

• Jeep Wrangler 4xe ($3,750 max credit)

• Jeep Grand Cherokee 4xe ($3,750 max credit)

• Lincoln Corsair Grand Touring ($3,750 max credit)

For more details on the credit for new vehicles, see the IRS site.

The third thing you should know - Not every US taxpayer is eligible

Not every taxpayer qualifies as there are (still) income limits, which is typically described as $150k for single taxpayers and $300k married and filing jointly and $225k for head of household.  If you earn more than that, sorry, no soup for you.

The fourth thing you should know - if you transfer the credit to a dealer and you exceed the income limit, you need to repay the IRS

The “tax on the hood” tax credit is still a tax credit that is individual to the taxpayer purchasing the EV.  What you are effectively doing is assigning the credit to the dealer, and the IRS will pay the dealer the amount within 72 hours.  When you purchase a qualified EV from a qualified dealer, you will need to give the dealer some basic information, that the dealer will report to the IRS. The dealer will then give you a report that you will file to the IRS the next time you pay taxes.

One of the things you must give to the dealer is your estimated adjusted gross income for the current tax year.  The natural question that arises is, what if you guess wrong and make too much money (lucky you)?  That’s simple.  You’ll owe the IRS the tax credit back.

Except there is an asterisk there as well.  If your filing status changes from the year prior to your purchase and the current tax year, and you would have qualified for the income limit under your previous filing status, then the income limit is forgiven for the current tax year.  A classic example of how this applies and who it would benefit could be couples who marry.  A single person might qualify for the income limits in 2023, but then marry in 2024 and their partner’s incomes put them over the limit.  This loophole allows the couple to still realize the credit, even though their new filing status and income levels put them over the top.

The fifth thing you should know - everyone qualifies regardless of tax liability

In a rather stunning policy decision, the IRS has ruled that if a qualified buyer purchases a qualified vehicle from a qualified dealer and that buyer does not have sufficient tax liability to offset the credit, the overage is effectively waived. 

The sixth thing you should know - used vehicles now qualify

All this applies to used vehicles, starting this year with a potential credit of up to $4,000.  The maximum allowable income limits are lower and the criteria for the vehicles are different.

• The vehicle model year must at least 2 years earlier than the calendar year when you buy it. For example, a vehicle purchased in 2023 would need a model year of 2021 or older.

• Must have never had a used vehicle credit applied previously

• The negotiated price (not MSRP) must be less than $25,000

The EV is also not under the same certification requirements, but the dealership selling the vehicle must still be registered with the IRS and similar reporting requirements are in effect.

The seventh thing you should know - leasing is different

All of the above applies to the purchase of a new EV.  If you plan to lease, you do not get to take the credit, but your leasing company might.  And they might even pass some or all of the credit to you. Another important thing to know is that none of the above applies to leasing companies.

The best advice for consumers who wish to lease is to review the total cost, including the money factor, carefully to see if they are getting the full benefit of the tax credit, part of it, or none of it.

Consumer Reports maintains a list of auto manufacturers who offer a capital reduction (or money factor reduction) for the EV tax credit for their lease programs.  You can review that list here.

Summary

While it can be a lot to take in, if you let it percolate for a while, and stick to the three takeaway bullets in the TL;DR section, you’ll soon realize it is a great time to be in the market for a new EV.