How to Take Advantage of the $7500 Federal Electric Vehicle Tax Credit If You Make Too Much Money
How to Take Advantage of the $7500 Federal Electric Vehicle Tax Credit If You Make Too Much Money
Navigating the EV Tax Credit Maze: A High Earner's Guide to Leasing
Everyone gets $7,500 to buy an electric car. Or do they?
The world of electric vehicles (EVs) is buzzing with the recent update from the IRS regarding the EV tax credit. The government is trying to push electrification and the move to cleaner EV’s. They created a $7,500 tax rebate for the purchase of a new Electric or Plug-In Hybrid.
In the wisdom of the Federal Government though, they put a maximum gross income cap of $150K for individuals and $300K for cars that routinely cost over $60K. Does it make financial sense to pay over 1/3 of your annual income for a car? Thats a budgeting debate for a separate post. It’s unclear who they were expecting to take advantage of this highly promoted tax credit. This gross income level clearly disqualifies most HENRY’s, especially those that are married and live in 2-income households where its very common to surpass the $300K ceiling.
However, there's a silver lining. Instead of buying a car, if you lease it - the dealer can file for the credit and apply a $7500 rebate as a cap cost reduction on your lease. Let's dive into the details and see how you can make the most of this opportunity.
Understanding the EV Tax Credit
The Inflation Reduction (or Creation) Act has brought about significant changes to the EV tax credit, making it more complicated and restrictive. The new requirements include maximum MSRP, income limits for taxpayers, and new battery requirements. Plus, cars need to be assembled in North America to qualify. This means several vehicles no longer get a tax credit after the changes last August. According to IRS.gov:
Who Qualifies
You may qualify for a credit up to $7,500 under Internal Revenue Code Section 30D if you buy a new, qualified plug-in EV or fuel cell electric vehicle (FCV). The Inflation Reduction Act of 2022 changed the rules for this credit for vehicles purchased from 2023 to 2032.
The credit is available to individuals and their businesses.
To qualify, you must:
Buy it for your own use, not for resale
Use it primarily in the U.S.
In addition, your modified adjusted gross income (AGI) may not exceed:
$300,000 for married couples filing jointly
$225,000 for heads of households
$150,000 for all other filers
The tax credit is nonrefundable, which means that taxpayers need to make enough money to have $7,500 of tax liability to be reduced, but not enough to be above the income limit. Additionally, taxpayers need to wait until they file their taxes in order to take advantage of the credit, which means they have to front the $7,500 and get it back later. But both of these downsides will be fixed next year when the tax credit is due to become available upfront at the point of sale.
The Loophole: Leasing
Here's where it gets interesting. All these complications can seemingly be avoided with one simple trick – leasing. According to an IRS note from December, EVs can avoid the foreign-assembly restriction of the law if they are leased, not purchased. This interpretation was originally pushed for by South Korean automakers who felt jilted by the domestic assembly provisions of the Inflation Reduction Act.
The reason for this is due to two different sections of the law: 30D and 45W. Section 30D deals with individual purchase credits, and 45W deals with commercial credits. All of the aforementioned restrictions are only present in section 30D of the law, not section 45W. Commercial vehicles can be over 80k MSRP, they can be assembled outside of NA, their battery sourcing isn’t as controlled, and buyers can make more than $150k income.
The “loophole” comes in due to the IRS’ December interpretation of how leases are categorized. IRS states in their fact sheet (topic G, Q5) that businesses that lease vehicles are allowed to claim the commercial EV tax credit for each leased vehicle. This means that as long as the vehicle fulfills the relatively minor requirements of 45W (and is a “bona fide lease” as laid out in Q6 of the same fact sheet), then a lessor (i.e., the manufacturer’s leasing arm) can file for the $7,500 EV tax credit. This applies regardless of whether the lessee is a business or an individual.
While this “loophole” might seem too good to be true, it does offer a unique opportunity for high earners to take advantage of the EV tax credit. By leasing an EV, you can bypass many of the restrictions of the law, potentially making your dream of driving an EV more affordable.
The Impact on Leasing
Given that the EV market is still impacted by high demand and low availability, some brands and dealers may not feel the need to pass along these savings because they’ll be able to sell or lease cars regardless to a populace that ravenously demands the limited available supply. However, consumers should still know about these deals, as EVs are often cheaper than their MSRP might suggest.
The Inside Scoop: Vehicles That Qualify for the Lease Incentive
Now that we've cracked the code on how high earners can leverage the EV tax credit through leasing, let's delve into the vehicles that qualify for this golden opportunity. As of May, 2023, the following vehicles are offering a $7,500 lease incentive through the manufacturer’s affiliated lender:
Audi's Q4 e-tron, Q5 55 e, e-tron, e-tron GT
BMW's i4 eDrive35, iX xDrive50, iX M60
Chrysler's Pacifica Hybrid
Jeep's Grand Cherokee 4xe, Wrangler 4xe
Genesis' GV60, Electrified GV70, Electrified G80
Hyundai's IONIQ 5, Kona Electric
Jaguar's I-PACE
Kia's EV6
Lucid's Air
Mercedes-Benz's EQB, EQE Sedan, EQE SUV, EQS Sedan, EQS SUV
Nissan's ARIYA
Polestar's 2
Porsche's Cayenne E-Hybrid, Panamera E-Hybrid, Taycan
Subaru's Solterra
Volkswagen's ID.4
Volvo's C40 Recharge, XC40 Recharge, XC60 Recharge, XC90 Recharge
However, it's crucial to note that not all car companies pass on the $7,500 commercial clean vehicle tax credit to lessees. Ford, GM, and Tesla, for instance, currently do not offer a $7,500 lease incentive for EVs. This is likely because the majority of their electric vehicles sold in the U.S. are assembled domestically and are already eligible for the full $7,500 consumer EV tax credit. As a result, these companies may not feel the urgency to incentivize leases at this time.
The Mechanics of the Lease Incentive
If the manufacturer’s affiliated lender offers it, the $7,500 incentive is applied as a capitalized cost reduction, akin to a down payment, towards the lease of a vehicle. However, this lease incentive doesn't automatically translate into a fantastic deal. Some lenders, such as Hyundai Motor Finance, have reduced the lease residual value and increased the money factor (the lease's interest rate) upon offering the $7,500 lease incentive, leading to only minor changes to the monthly payment.
My Own Recent Experience with Jeep
I just took advantage of this Lease credit with a new 2023 Jeep Grand Cherokee 4xe Plug In Hybrid. The MSRP on the car is $63K, but my lease payments are only $399 after rebates that totaled almost $13K. An equivalent Gas-Powered Grand Cherokee Limited Would have an MSRP around $40K, but the quoted lease payments would be north of $500 due to the money factor and residual math. Even if I never plug in my car and choose to exclusively burn gas - I end up with a lower monthly payment, better fuel efficiency, and more horsepower & torque than the gas exclusive car. Does this make sense - no. But who am I to pass up a good deal?
The Double Loophole - Buyout your car
While leasing is an attractive option, some people really like owning their cars for a variety of reasons. If you initially planned on purchasing the vehicle, a savvy strategy is to first lease the car to capitalize on the newly available $7,500 lease incentive. Then promptly buy out the vehicle to dodge the high-interest charges and the income limit restriction. Most lease contracts allow an early lease buyout.
Wrapping Up
While the EV tax credit has become more intricate and restrictive, there are still avenues for high earners to benefit from it. Leasing an EV can sidestep many of the law's restrictions, potentially making your aspiration of driving an EV more attainable. However, it's essential to balance the pros and cons and consider your unique financial situation and objectives.
So, what's your perspective on this financial shortcut? Have you contemplated leasing an EV to benefit from the tax credit? What factors did you weigh, and what decision did you ultimately make? Share your stories and viewpoints in the comments below.