As much as brands try to simplify the EV buying process, purchasing an electric vehicle can be more complicated than buying a traditional new gas car. Prices are high, vehicles are in short supply, and many electrified vehicles come with federal and sometimes state incentives that aren’t always the easiest to figure out. Well, let us help you. Here’s a quickie guide that will help you decide when to buy, when to lease, and what the heck EV buying is all about.
What Is the Federal Tax Credit?
Since 2008, the US government has had a program incentivizing the purchase of plug-in vehicles (both electric and plug-in hybrids). A tax credit is applied to tax liability, meaning it doesn’t reduce or add to your taxable income, but instead is credited to any money owed to the federal government. The criteria are a little hard to parse out via the IRS legalese documents, but I’ll help.
The federal tax credit is:
- Ranging from $2,500 to $7,500 max. The base $2,500 floor applies to any plug-in hybrid or electric vehicle with a minimum battery size of 5.0 kWh. After 5.0 kWh, each additional kWh is worth $417 of credit, maxing out at $7,500.
- Is only eligible for new vehicles.
- Is limited to the first 200,000 plug-in vehicles sold by a corporation. After that, the program enters into a step-down mode, halving the amount every two fiscal quarters, until removing it entirely by the next year or fourth quarter. Currently, plug-in vehicles from General Motors and Tesla are no longer eligible for tax credits, as both companies have sold more than 200,000 plug-in cars. Toyota recently hit this threshold and is expected to enter the first step-down stage by October 2022. (If you’re thinking about buying a Toyota BZ4X, now’s the time to do it.)
- Is a tax credit, not a tax rebate.
It’s a tax credit, Not a tax rebate
Tax credits are not the same as tax rebates. Whereas tax credits allow a taxpayer to deduct a certain amount from the tax they owe, a rebate is a payment that the government makes. Manufacturers, advertisers, and some publications have gotten into a bad habit of advertising a post-tax credit “price” as the real price one would pay at the dealership. That is not how the federal tax credit works.
The federal tax credit comes out of your personal tax liability, not the vehicle’s MSRP. Your payments and auto financing are based on the full-fat MSRP. The tax credit can only be applied to any money owed to the federal government on your taxes, not as a sort of coupon that makes the vehicle cheaper to buy. Also, because it’s a tax credit, not a rebate, no extra money will be returned to you. So, if you only owe $2,000, you’re not getting a check back for $5,500 from the federal government. You won’t get anything.
As my colleague James Gilboy elaborated, the high dollar amount of untaxed income to be eligible for the $7,500 is around $65,000, annually. Depending on where you live, and if you have any dependents, this could be solidly middle class or below the poverty line. Either way, $65,000 of untaxed income, to be paid at the end of the year as a lump sum, isn’t quite the common circumstance for the average EV-curious American. Three out of four Americans get tax refunds, and the IRS says that the average tax refund check was a little more than $2,800 for 2021. Ergo, the tax credit won’t do diddly squat for most Americans.
When It Makes Sense To Buy an EV
As the program stands right now, the range of EV-curious buyers who want to take advantage of the tax credit program remains somewhat limited. The average American with a W-2 job probably won’t gain much, but if you fall into these categories, the tax credit could be a boon.
- W-2 wage high earner expected to owe around $7,500 in taxes after other credits and rebates
- A 1099 independent contractor, or anyone with multiple untaxed income streams that will inevitably owe at the end of the year.
Still, that doesn’t mean EV ownership is out of the question for most Americans. Cars like the Chevrolet Bolt and Bolt EUV offer more than 200 miles of real-world range and are priced a little above a well-specced subcompact crossover. Volkswagen has plans to introduce a cheaper, smaller-battery version of its ID.4 crossover, so there are options.
Or, maybe it’s smarter to lease.
When It Might Make Sense To Lease an EV
Qualifying for the federal tax credit is a cut-and-dry process; either you have the tax liability or you don’t. But, things get a little complicated if you’re a big corporation with lots of losses and tax liabilities. For example, a big bank that underwrites and finances vehicle leases.
Many automakers are underwriting the $7,500 tax credit into the vehicle lease. This leads to lower lease costs, or lease deals with better rates or terms compared to traditional gas or hybrid vehicle. In the olden days, when state incentives were higher, banks could stack credits and rebates together, allowing for stunningly cheap lease rates. In the mid-2010s, it wasn’t that hard to find Mitsubishi i-MiEVs, Fiat 500e, and even BMW i3s leasing for around $100 per month or less.
We’ll probably never see fantastic leases like that again, but from price to price, an EV lease will likely be cheaper than its ICE equivalent. For example, when specced to about the same price level and lease terms, a $49,800 Polestar 2 is $115 cheaper to lease than an equivalent Mercedes Benz C-Class.
To many, leasing is a dirty word, but in the EV world, it might not be so bad. EV technology seems to be advancing almost; In 2012, the i-MiEV and Nissan Leaf struggled to crest more than 60 miles of range and hit 60 MPH in less than 15 seconds. In 2022, we have more than a dozen vehicles that can sail well past 200 miles, and we have big sedans that can embarrass not-that-old supercars with little effort. Letting the bank deal with depreciation on a vehicle that may quickly be outdated might not be a terrible idea.
There are plenty of holes in our current EV tax credit system, but if you can play, then work it to your advantage. I’d rather you do your research now, rather than overextend into a too expensive EV, banking on a tax credit you mistakenly thought you qualified for. Read this article, take notes, then be a smart, savvy shopper.