Is It Time to Finally Buy an Electric Car Under the New Tax Credit Rules?
Electric Vehicles
Speaker 1: For the first time in about 12 years, a major overhaul of the federal incentive for buying an electric car, that's always been the biggest incentive and now it's very different and a lot more complicated. Here's how to navigate it.
Speaker 1: First of all, the good news is the federal government is now extending the EV tax credit. Uh, until about 2032, there was some concern it was going to expire, but now [00:00:30] it's back with a nice long run and that's a $7,500 tax credit as it has been. Now, the next big news is that they have lifted the cap on success. They used to penalize car makers in a sense, once they sold 200,000 cars with a plug electric or plugin hybrids of certain types, after that, the credit would phase out for that brand of car. So the car companies that sold the most Tesla and general motors in particular ended up [00:01:00] being handicapped. Their cars gradually started to sort of cost $7,500 more than a competitors because they lost the credit because they were good at selling EVs. It was always kind of strange that cap is gone.
Speaker 1: Car makers can sell as many as they want, and this federal tax credit will continue to apply. Now there's a new good guy around that credit for you. And that is you can now apply it right up front. When you buy a new car with a plug from [00:01:30] a dealer used to be, you had to wait until you filed your next taxes, and then you would put the credit in and I'll explain how the credit works financially in a minute. But now you can use it almost like a rebate, which a lot of folks apply at the time of purchase just to whack the price of the car right up front. That's nice. Now note that even though you can take the credit up front, you have to qualify for it at the next tax filing time. If you don't or don't fully qualify, they can cost some [00:02:00] of it back. They being the IRS.
Speaker 1: Okay. So a lot of good guys here for the people who are in the market for an electric car, but there are also a lot of new gotchas that are both potentially chilling on the market. And at least very complicated. I'm gonna lay them out for you. But first, a quick recap on what that $7,500 federal tax credit does, it reduces the amount of tax you owe on the income you've earned through the year. That's different than [00:02:30] a tax deduction. Like when you make a charitable contribution, you're able to deduct that from your gross income, but this is different. This wax, the total amount of tax due, you might say, wow, $7,500 is a lot of reduced income tax. It is, but it cannot be turned into a refund. The most it can do is to reduce your total tax owed on income for the year to zero. It's not refundable.
Speaker 1: Okay? Now those gotchas I told you about and grab a cup of coffee. [00:03:00] There's a lot of them. This is where there's a bit of a wet blanket thrown on the story. First of all, there are new price limits on the vehicles that qualify for a car it's $55,000 for trucks, SUVs, and vans. It's $80,000. So in other words, if you're looking to buy our Tycon, this isn't gonna apply to you on the other hand, the next gotcha. Makes that less of a problem. And that is income limits. Now you may only make $150,000 [00:03:30] and that's that adjusted gross income on your tax return to qualify for the credit, or if you're ahead of household, it's 2 25, or if you are jointly filing it's 300,000. Now we get into some rules that are kind of in the international trade arena. This is fun. The vehicle you buy must be assembled in north America. That means Mexico, us or Canada. The good news is there are a lot of automotive plants building EVs in those three countries. The bad news is not every EV is built in north America and some of [00:04:00] the sassiest ones come from abroad. So that might be a problem for the car you intend to buy and note that this requirement goes into effect as soon as the legislation is signed. Whereas some of the others I'm gonna tell you about phase in over years.
Speaker 1: Now we get to the really sticky wicket, the new critical materials rule this largely has to do with the materials that go into the battery, which is a lot of heavy metals and rare earth minerals that come from a variety of countries, some of which are [00:04:30] contentious and controversial, others of which have cornered the market on these minerals in a way that is a big strategic concern. And that's why these are being put into place. Simply put when this law first takes effect, 40% of the materials need to be coming from the us or a country. We have a free trade agreement with that percentage jumps to 50% by 20, 24, 60% in 2025, 70% in 2026 and a robust 80% by 2027. [00:05:00] This is gonna be some tough news for companies like Tesla, Ford, GM, all of whom have been in the headlines recently securing big battery contracts, but not necessarily sourced in the us or one of its free trade partners.
Speaker 1: According to some industry pundits, something like 70% of the EVs currently on the market will not qualify for a federal tax credit based largely on this critical materials rule, not for a year or maybe two as [00:05:30] manufacturers reorient where they're getting their battery guts from. Okay, now let's turn to used EVs some new wrinkles here. And I like this because you know me, I'm a big fan of late model used cars. And we're at a point now in the electric car era, when there is a fair number of late model used ones on the market though, there's not a lot of used anything on the market right now. Here's how the new used rules go. If you buy a used D it must cost $25,000 or less to qualify for a federal tax credit [00:06:00] of either $4,000 or 30% of the car's purchase price, whichever is less.
Speaker 1: And as a buyer, there are income limits. This time it's $75,000 for a single filer, 1 12 5 for a head of household and 150,000 total income for joint filers. And as I think I mentioned earlier, these rules largely apply to plug-in hybrids. As long as they have a battery of seven kilowatt hours or more, as I read it, that's not too hard to hit. [00:06:30] Look at a Toyota Rav four prime plug-in hybrid. I believe that's an 18 kilowatt hour battery so far larger than necessary to get the credit. So you're really good on that. If however, you were to be buying an old, early plugin hybrid with very limited range, you might have a problem with the seven kilowatt hour rules. Now, by the way, if you are going to buy a commercial vehicle for your business, there are new set of rules around that as well. Not gonna cover that right here. It's a little outside of my domain because of the way it [00:07:00] interplays with business tax filing. And there also are some new incentives for bidirectional charging equipment installation. That's the kind of gear where you can put a charge in the car, but it can also take a charge from the car and send it back up to a building or the grid if there's a need, a brownout or a blackout, but that's a different topic.
Speaker 1: Okay? Bottom line, this complicated set of new rules looks like it's gonna be worse initially and better in the long term, [00:07:30] worse in that a whole lot of electric cars apparently are not gonna qualify for a federal tax credit anymore until their makers can reorient where they are assembled or where the critical materials come from, or both now general motors in Tesla are gonna say, we don't care. This credit phased out for us a long time ago. So we're actually getting a level playing field again with our competitors. But over time, this whole thing is better for the overall market of buyers like us, because it appears to spread [00:08:00] the love more and encourage car makers to do the right thing and put more manufacturing and material sourcing into regions where America feels better about it happening. So if you go out there and look to buy an EV right now know that the rules are gonna be a little complicated and you're gonna need to move quickly to take advantage of the old rules. That's gonna be hard because there are not a lot of EVs sitting on lots waiting to be bought anyway, and this may add pressure to dealers [00:08:30] marking up those cars because they know there are more people now perhaps scrambling to grab cars under the old rules, tight it first, but overall, this does appear to bolster and support our move to electric vehicles over the long term.
