Starting in January, eligible electric vehicle buyers can receive a federal tax credit as an upfront discount at the dealership, making savings more immediate, the U.S. Treasury Department announced Friday. Prior to the new guidance, buyers – including those who bought electric vehicles this year – have had to claim EV credits after the fact, on their federal income tax returns filed after the end of the year.
The shift, building on a policy envisioned by the Inflation Reduction Act, a package of green incentives Congress passed in 2022, marks the latest federal move to turbocharge the shift to electric vehicles. The White House is also pushing to have 50% of new vehicles be electric by 2030. “For the first time, the Inflation Reduction Act allows consumers to reduce the up-front cost of a clean vehicle, expanding consumer choices and helping car dealers expand their businesses. The IRS has focused on streamlining this process for car dealers as part of its commitment to improving service and helping taxpayers claim the credits they are eligible for, ” said Laurel Blatchford, Chief Implementation Officer for the Inflation Reduction Act at the Treasury Department.
Signed into law in August 2022, the Inflation Reduction Act provided credits of up to $7,500 for new clean vehicles and up to $4,000 for pre-owned vehicles–provided both the buyers and the vehicles meet certain requirements. Married couples with modified adjusted gross income of up to $300,000, and single filers with MAGI of up to $150,000, are eligible to claim the new vehicle credits. The used EV credits have income cutoffs of half that— $150,000 and $75,000.
To get the discount at a car dealer, buyers will have to attest to the fact that they were either below the income limits in the prior year, or believe they’ll be below the limit in the year they buy. If it turns out they weren’t eligible, they–not the dealer–will have to repay the credit.
Eligible new vehicles must undergo final assembly in North America and cannot cost more than $80,000 for vans, SUVs and pick-up trucks, or $55,000 for any other new vehicle. New electric cars must meet both battery and critical mineral requirements in order to qualify for the full credit. (In 2023, for example, 50% of battery components must be manufactured or assembled in North America). A car that meets just one of these requirements is eligible for a $3,750 credit.
The Tesla Model 3, Ford F-150 Lightning and Chevrolet Bolt are among vehicles eligible for the full federal tax credit, according to Consumer Reports. Teslas, followed by Chevrolets, were the most popular choice for electric vehicles in the second quarter, when nearly 300,000 new electric vehicles were sold, according to Cox Automotive. So far this year, more than 800,000 have been sold.
As for used EVs, they have no domestic manufacturing requirements but can’t cost more than $25,000. The tax credit for them equals 30% of the sale price, up to a maximum credit of $4,000. Congress’ intent with both the used car credit and the point of sale discount was to make the purchase of EVs more affordable on the front end. While they can cost less to operate over the life of a vehicle, EVs tend to be more expensive up front. The average electric car costs $53,469, compared to $48,334 for gas powered autos, according to July data from Cox Automotive, parent of Kelley Blue Book.
The Treasury said the provision was driven by research that emphasized the importance of a point-of-sale discount. In fact, George Washington University researchers concluded in 2022 that immediate rebates are “the most-valued” incentive design, compared with tax credits, tax deductions and sales tax exemptions.
(Notably, while Congress didn’t include any incentives for e-bikes in the IRA, state and local governments and agencies have been jumping into the gap—and doing it in the form of point-of-sale rebates.)
For buyers to be eligible for the federal tax credit, the dealer they buy from needs to be registered with Energy Credits Online, a new IRS website. Once the dealer documents the sale, the IRS will pay them back the funds within 72 hours. The Treasury said the new policy is designed to help dealers grow their business. Mike Stanton, president and CEO of the National Automobile Dealer Association, said the new requirements were “aligned with two major priorities that NADA stressed to Treasury would be needed for successful implementation of the clean vehicle tax credit program in the showroom.”
Beyond the federal credit, some states, including Colorado, Vermont and New Jersey, offer additional incentives. Although the average sticker price for electric vehicles exceeds that of gas-powered cars, an analysis from Consumer Reports suggests there could be more savings. Over a vehicle’s lifetime, electric vehicles can save a typical driver $6,000 to $12,000, compared with gas-powered vehicles. Electric vehicle drivers also spend 60% less to power their vehicle compared to those with gas cars.
You can read the full IRS guidance here.