How to Maximize Your Federal Tax Credit for Electric Cars in 2022
Taxpayers may receive up to $7,500 as a federal tax credit for electric cars in 2022. In this blog we will discuss what the credit is, how it works, and more.
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How does the electric car tax credit work in 2022?
In 2022, taxpayers may receive up to $7,500 as a federal tax credit to purchase a new electric or plug-in hybrid vehicle. Depending upon the vehicle's battery capacity, the amount of the credit will vary by model. Check the U.S. Department of Energy’s Federal Tax Credit website, FuelEconomy.gov, to see which vehicle models qualify for the entire federal tax credit.
This tax credit can create a situation where a newer vehicle model is, in fact, cheaper than a lightly driven used model because the new model qualifies for tax credits. For that reason, we recommend that you check the available make and model credit before you purchase a vehicle.
Consider these aspects:
#1 Non-refundable
This credit is non-refundable, meaning that if it reduces your Federal tax liability to below zero, you will lose out on some of the tax advantages.
For that reason, it may be useful to consider doing some financial planning early on in the process to get the full benefit. You want to make sure that you have enough Federal tax liability (taxes owed) to take full advantage of your credit. For example, if you owed $5,000 in federal taxes and received a $7,500 federal tax credit for buying an electric car, your taxes would be reduced to $0. Still, you would not receive a $2,500 refund check from the IRS.
#2 Must be used in 2022
The credit must be used in its entirety in the year of purchase. It cannot be carried forward or backward to offset taxes in the future or prior years.
If you owe less than $7,500 in Federal taxes, some ideas to generate taxable income include realizing capital gains in non-retirement accounts, doing a Roth conversion, or reducing your tax-deferred 401(k) or IRA contribution. These are only examples and can not be interpreted as advice applicable to any one person; for such recommendations, consult a financial advisor.
#3 New cars only
This Federal Tax Credit for buying an electric car only applies to new cars. Unfortunately, you cannot claim the credit for a used vehicle purchase.
#4 Owners only
If the vehicle is leased, the leasing company is eligible to claim the credit, not the lessee.
#5 Income limits
There may be a Federal Tax Credit electric car income limit in some states. For example, it seems as if lower income applicants are eligible for higher incentives in the Clean Vehicle Rebate Project in the state of California.
Are Tesla or GM vehicles eligible?
The government has elected to phase out the vehicle credits as new unit sales increase, potentially impacting some of the larger vehicle manufacturers.
Each manufacturer's expiration date is separate and comes after an automaker sells 200,000 eligible vehicles. Tesla and GM both hit that figure in 2018. According to Edmunds.com, Nissan may have hit that figure in 2021 as well.
What about state tax credits?
Many states and municipalities offer a variety of incentives for purchasing electric vehicles. These can be monetary incentives or convenience incentives such as driving in HOV lanes or being exempt from some vehicle regulations.
For example, new EV purchasers may qualify for up to $750 in state tax credits in California in 2022 under the California Clean Fuel Reward program. Information specific to your state can be found on the U.S. Department of Energy’s Federal and State Laws and Incentives page.
Tax credit vs. tax deduction
A tax credit is generally more valuable than a tax deduction because it reduces the total amount of income taxes you owe dollar-for-dollar. For example, if you were subject to a 15% flat tax and earned $100,000, you would owe $15,000 in taxes. A $7,500 tax credit would reduce the amount owed by half so that your tax bill would be $7,500 total (holding all other things constant).
However, a $7,500 tax deduction would reduce your taxable income from $100,000 to $92,500 so instead of owing $15,000 of taxes you would now owe $13,875.
Let’s compare the tax credit vs. tax deduction in this example.
The tax credit reduces your tax bill to $7,500
The tax deduction reduces your tax bill to $13,875
That’s a huge difference. People often overlook difference between the two. Many believe that saving money on a deduction (like home loan interest) is the same as a tax credit. This example demonstrates how valuable a tax credit can be when compared to a tax deduction. If tax calculations like this aren’t your thing, make sure to consult a financial or tax advisor.
Tips for environmentally-minded car buyers
Here are some general ideas to keep in mind if you want to fully evoke the benefits of owning an electric car – for both you and the environment.
The Federal Alternative Fuel Infrastructure Tax credit expired at the end of 2021. However, businesses and homes may still be eligible for state or local incentives for installing charging stations.
Realize energy savings by charging your vehicle at work, the gym, or other free recharge stations.
If you have solar panels in your roof, you can utilize excess capacity to recharge your vehicle at home.
Aside from the financial benefits, electric cars reduce your own personal carbon footprint. Kudos to you!
Concluding thoughts on the Federal tax credit for electric cars in 2022
As you can see, there are several important financial considerations to take into account regarding the Federal Tax Credit for electric cars in 2022.
If you have questions, please reach out. We commend you for your clean energy journey and hope you’ll subscribe to our newsletter at the very least!
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CONTRIBUTOR
Andrew Hoffarth, CFP® is a Lead Advisor with Financial Alternatives. When he’s not enjoying outdoor activities with his family, he excels at finding solutions for complex financial situations, allowing successful families to focus on what is most important to them. Schedule a time to chat with Andrew.