The process of determining if you qualify for an electric vehicle federal tax credit has always been complicated, with factors like make, model, pricing, and your state and income all playing a role.
But soon, buyers will no longer have to wait until tax time to find out if they’ll receive the valuable credit. Recent IRS rule changes will allow dealers to apply the tax credit savings directly at the point of sale for EVs purchased next year and beyond.
For example, under the new guidance, a buyer eligible for the full $7,500 federal credit on a new 2024 Tesla will now get that amount deducted directly from the purchase price, rather than waiting to receive it as a tax refund the following year. However, buyers will still need to meet the same qualifications to receive the credit.
Key Criteria for Federal EV Tax Credit Eligibility
The federal electric vehicle tax credit has certain limitations on income and vehicle price/origin that determine if a buyer can qualify:
- Household income cannot exceed $300,000 per year
- The EV must have a manufacturer’s suggested retail price under $55,000
- Only EVs assembled in North America are eligible
With luxury EVs like a Lucid Air or Tesla Model S Plaid Edition exceeding the price cap, buyers interested in those models over $55,000 would not qualify for the federal credit. However, there are still ways to realize savings on high-end EVs through leasing.
Leasing an EV Can Unlock Savings for High-Income Buyers
While buying a car often costs less overall compared to leasing if you plan to keep it for many years, leasing does offer lower monthly payments. This is because the leasing company owns the vehicle and sells it at lease-end to recapture residual value.
For EVs priced over the federal tax credit limit, leasing enables high-income buyers to benefit. That’s because eligibility for the EV tax credit applies to the leasing company, not the lessee. So the company can take the $7,500 credit to effectively lower the capitalized cost of the EV lease.
Stacking Federal and State Credits Can Add Up to $15,000 in Tesla Savings
In addition to the federal incentive, many states also offer EV rebates, credits, or other perks that buyers can combine for huge savings:
- California offers an additional cash rebate up to $7,500 off the purchase or lease of an eligible EV like a Tesla. When combined with the $7,500 federal tax credit, a total of $15,000 in discounts is possible.
- The state also provides a $2,000 “clean fuel reward” via a prepaid debit card to put toward public EV charging for buyers who qualify for the state rebate.
- Connecticut currently offers a cash rebate at the point of sale ranging from $2,250 to $7,500 for Teslas and other EVs purchased or leased in-state.
Real-World Example: Slashing the Cost of a New Tesla with Credits
To understand the potential savings, let’s look at the math on a new base Tesla Model 3 in California:
- Starting MSRP: $39,000
- Federal tax credit: -$7,500
- California state rebate: – $7,500
- California fuel card: – $2,000
- Total pre-tax price: $22,000
With total discounts of $17,500 from the combined federal and state incentives, the effective cost of the Tesla is reduced to $22,000 – more than 45% below its original $39,000 MSRP and $26,000 less than the current $48,000 average new car transaction price.
Caveats to Understand Before Claiming EV Credits
While the potential savings from federal and state EV incentives are massive, there are some important limitations and conditions to note:
- Eligibility rules, credit amounts, and funding could change at any time based on legislation. Shoppers should verify current program status.
- Actual tax credit amounts applied could vary or be reduced based on your specific tax situation. Consult a tax professional for advice.
- To qualify for state incentives, buyers may need to be residents of that state. Temporary eligibility exemptions related to COVID-19 residency waivers are expiring.
- Special rules and restrictions apply when leasing to claim credits – consult the leasing company.
The Bottom Line
With clever stacking of all available incentives, buyers can realize thousands in discounts off the purchase price of a new Tesla and other EVs. But credits are not guaranteed, so interested shoppers should discuss their unique situation with both their tax and auto advisors to maximize savings while insuring eligibility.