Taking Advantage of the Enhanced EV Tax Credit

When many financial folks talk about spending they often mention the three “big rocks” of food, shelter, and transportation. That’s not to say that the rest of your spending isn’t important, it is, but if you get the three big rocks right (or wrong) they will have a much larger impact on your financial well being. I think most people have a sense of how much their shelter costs them, and these days the cost of groceries and/or eating out is fairly apparent as well. But I think most people vastly underestimate how much they spend on transportation. It’s not just the up-front cost of the car, but the ongoing costs of fuel, maintenance, and insurance. Many folks also have to add on parking costs and some people, Americans especially, seem to spend an inordinate amount of money on car washes.

There are ways to combat this of course, including not owning a car at all and relying on public transportation, bicycles, and the occasional cab or Uber. But many folks are still going to want to own a car, so the next standard piece of advice is to buy used and, if at all possible, minimize how much you drive. This will not only save you financially, but increase the quality of your life by cutting down on time wasted on commutes. You should also only buy what you actually need in terms of transportation, not necessarily what you want. There are way, way, way, too many SUVs and large trucks on American roads that are rarely – if ever – used for anything other than a daily commute.

As most of you likely know, we are in the beginning of a major transformation in cars, as we transition from ICE (internal combustion engine) vehicles to EVs (electric vehicles). I have a bias here, because I’m very concerned about climate change, and electrifying transportation is a huge piece of the solution. But even without my bias, electric vehicles are more efficient and, once manufacturers scale up production, will be much less expensive overall than ICE vehicles. There have been EV tax credits for a while now, but they just went through a major revision with the passage of the Inflation Reduction Act, and many new provisions went into effect today (January 1, 2023).

The Treasury Department just released some new, updated guidance (and fact sheet, pdf) on the tax credit. Unfortunately, there are still quite a few things that are murky, most especially that they’ve delayed until March 2023 the rules around mineral and battery sourcing. What that means, however, is that between now and when they release that guidance in March, more EVs will qualify for the full $7,500 credit than will once they release that guidance (because if they source minerals or batteries from certain places, they will lose some or all of the credit). While you should read the full guidance and/or fact sheet for all the details, I’ll just highlight the most important information below (all info as of January 1, 2023).

  • Vehicles must have final assembly in North America. This page lists all of the vehicles that current qualify, but keep in mind that the page keeps getting additions as manufacturers complete the paperwork. (Note that while I wish it wasn’t true, plug-in hybrids also qualify as long as they have at least a 7 KWh battery.) Over the next few years, many auto manufacturers have announced new factories in North America that will come online, spurred by these tax incentives, so more models will become eligible.
  • In order to qualify for the credit, the MSRP (not the price you pay) cannot exceed $80,000 for vans, sport utility vehicles and pickup trucks or $55,000 for other vehicles. That same page that lists the qualifying vehicles also lists the applicable MSRP limit for each vehicle. And this is another place where some confusion reigns, as some vehicles are classified as SUV and hence get the higher price limit while others – that appear to be of the same type – are classified at the lower $55,000 level. Take at a look at the Ford Mustang Mach E, the Tesla Model Y, and the Volkswagen ID 4. There does not seem to be any consistency, so it’s possible there will still be some revision here. (It makes no sense for the 7-seat Model Y to be SUV and the 5-seat to be not, they are identical cars except for the addition of the third row. Similarly, the two Volkswagen ID4’s with AWD shouldn’t be classified as SUV if the Mach E and Model Y are not.)
  • There are income limits in order to qualify for the tax credit. Your Modified Adjusted Gross Income (MAGI) cannot exceed $300,000 for Married Filing Jointly, $225,000 for Head of Household, and $150,000 for all other taxpayers. (Note that the income limits for used EVs, discussed below, are lower.)

Perhaps just as important, but much less well known, there is also a new federal tax credit for used EVs. Again, lots of details, but here are the highlights:

  • You must purchase the used EV from a dealer and the sales price must be less than $25,000.
  • You cannot be the original owner of the EV and each individual EV is only eligible for the used tax credit once. You are also limited to one used EV tax-credit every three years.
  • The model year of the EV must be at least two years earlier than the calendar year you purchase it. (For 2023, that means any model year 2021 or earlier).
  • The credit is 30% of the sales price up to a maximum of $4,000.
  • The income limits for used vehicles are lower, $150,000 for Married Filing Jointly, $112,500 for Head of Household, and $75,000 for all other taxpayers. (You can, however, use your MAGI for either the year you take delivery of the vehicle or the year before, whichever is lower.)
  • This page lists the qualified vehicles although, again, it should be getting some additions over time.

So what does that mean in the context of the beginning of this post that discussed keeping your transportation spending under control? Let’s take a look at a few EV possibilities you might want to consider as well as some caveats. First, the caveats. While most of the “drawbacks” of EVs are vastly overblown or outright false (here’s some info I compiled a while back, although it’s becoming a bit outdated), it is accurate that right now it is harder to take a long road trip in an EV compared to an ICE vehicle. Well, unless you have a Tesla. With the longer range that Teslas have, combined with their Supercharger Network, road trips with Teslas are very doable with not much more planning than a road trip in an ICE vehicle. (This past summer we took a trip in our Model Y from the Denver area to the Tetons, Yellowstone, Glacier, Banff, Jasper, then home again, and had zero charging concerns.) For other EVs, however, the charging infrastructure isn’t quite there. Yet. But it’s getting built out quickly and I would estimate that within three years it won’t be an issue for those vehicles as well.

So, if you need this vehicle to take fairly regular extended road trips, you’re probably limited to Tesla right now. Which isn’t a problem in terms of the cars, they’re great, but is a problem in terms of the price. They’re expensive, and only some of them will qualify for the $7,500 tax credit (Update at bottom, most Model 3 and Y’s now qualify) based on the current MSRP limits (I’m still hoping the Model Y gets modified to be included under the $80,000 limit). (Update: It did – see bottom of post). I think Teslas are fantastic, but most people don’t need this extended road trip capability. Either because they rarely take extended road trips, or because they own more than one car and they can use their other car for the long road trips. (And, for that matter, the cost of ownership of an EV is so much less that it likely makes more sense to buy the EV and rent a car for the occasional extended road trip.) And, for reasonably short road trips, say to the mountains to go hiking or skiing, pretty much any new EV will work just fine. (It’s only extended, multi-day road trips, with long drives on three or more consecutive days that are likely to be a problem right now in a non-Tesla.)

So, assuming you don’t need this EV for extended road trips, what should you buy? This will vary, of course, based on your needs, your budget, and even your wants. But I want to take a look at three possibilities that will meet the needs of a whole lot of folks.

New 2023 Chevy Bolt: Probably the best value in a new EV right now is the 2023 Chevy Bolt. With an EPA range of 269 miles, it will work great for your daily needs and even that occasional day trip into the mountains. (Again, I probably wouldn’t choose this model for extended road trips until the charging networks are built out and GM ups the charging rate on the Bolt). The base model of the Bolt start at $25,600 so, after the $7,500 federal tax credit, that comes out to $18,100 for a brand new EV with decent features and good range. And many states or municipalities have additional incentives. For example, Colorado has a $2,000 state tax credit, which brings the base Bolt down to $16,100! Now, most folks probably won’t get the base Bolt, but even when you upgrade to the 2LT edition it’s going to be around $30,000, which will be just over $20,000 net in Colorado. When you throw in the lower ongoing total cost of ownership (electricity is much cheaper than gas, no oil changes, many fewer moving parts so much less that has to be repaired), this is a fantastic deal. Especially when compared to the over $48,000 price tag for the average new car in the United States.

Note that the Bolt may not qualify for the full $7,500 after the new guidance on minerals and batteries is issued in March 2023 (best guess it that it will qualify for half, so $3,750), so you might want to buy now. And, for now at least, Chevy will even pay for a standard home installation of a Level 2 (240-volt) outlet (not that that’s necessary, but it is nice to have.)

Used Nissan Leaf: While a new Chevy Bolt is great, many people can save even more by buying used. For quite a few folks, their EV can be their second (or third or fourth) car and will only be needed for a daily commute. With most American’s daily commute being less than 40 miles, any EV that has a range of at least 50 miles (or a bit more to include some errands) will do the trick. A key thing to know about Nissan Leaf’s is that there have been multiple generations, and the differences between each generation can be significant. The first Leaf I would even consider for most folks would be the 2013-2015 generation, which originally had ranges of 75-84 miles. But those vehicles have most likely suffered some battery degradation (the early Leaf’s did not have very good battery management systems), so their usable range now is likely to be 50 miles or less. That’s still perfectly adequate if you have a short commute (say, 30 miles round trip a day or less just to be safe). In my neck of the woods, you can find these priced between about $9,500 and $13,000. With the 30% tax credit, that lowers them to around $6,650 to $9,100. Wow.

Many folks won’t be comfortable with that limited range, however, so you might consider the 2016-2017 version of the Nissan Leaf, where the range bumped up to about 107 miles. These are typically selling in the $17,000 range, or $13,000 after the tax incentive. The 2018-2021 versions get between 149-226 miles of range depending on the model, and also had better battery management so likely will suffer from less degradation. But, at the moment at least, dealers seem to still be trying to sell these in the low $21,000- $23,000 range, or $17,000 – $19,000 after tax incentive. While that’s not bad, at that point I would definitely kick in the extra and just buy a new Bolt. (I think they’ll have to drop those prices soon.)

Used Plug-in Hybrid: While I’d really like to see folks go straight to full EV, if you just aren’t that comfortable with it yet than you can buy a plug-in hybrid that, if you have a short enough commute, can function pretty much like a full EV. Plug-in hybrids allow you to travel a certain distance on electric power, and then the hybrid gas engine kicks in. Depending on the model, you can typically get between 35 and 55 miles of range on electric before the gas engine kicks in. We owned a 2013 Chevy Volt for three plus years and very rarely used gas (it does make you put in new gas about once a year to keep it from getting stale). While they aren’t listed on the Treasury site yet, I would expect the Chevy Volt, Honda Clarity and Toyota Prius Prime plug-ins to all qualify for the used credit. You’ll likely find these anywhere between $12,000 and $24,000 depending on the year (range), mileage, and condition, which will end up being between $8,400 and $20,000 after the tax incentive. Again, once you pass a net of $16,000 or so, I would definitely go ahead and buy a new Bolt.

Please note that there are many other used EVs and plug-in hybrids out there and, depending on what’s available near you and your needs, one of them might be a better choice. I think many folks will be able to get a very good deal on one of the three options above that would serve very well as a daily driver, save you money both now and over time, and help combat climate change. So, if you’re in the market for a new (or new to you) vehicle, please take the time to fully evaluate whether an EV might be both the best choice for you and, with the help of the tax incentives, the most economical choice as well.

Update 1-16-23: While all of the above still applies, Tesla just made some dramatic price cuts that bring the cost of most Model 3 and Y’s under the threshold for the tax incentive. While they still are expensive cars, they now are in line with – or actually less expensive – than equivalent cars (whether gas or EV). Here are the prices of the three models most folks should consider (you don’t need the Performance Model, really) with the $7,500 federal and $2,000 Colorado tax incentives taken off. Note that there are different configurations so prices can vary, but this is the base model in each version.

  • Model 3 RWD: $34,490
  • Model 3 AWD: You still can’t build to order this (yet), but there are some appearing in inventory: $40.490
  • Model Y AWD Long Range: $43,490

At these prices, these are a very good choice for those who can afford them, and particularly if you want your EV to be a road trip car.

Update 2-3-23: IRS has adjusted the caps, so all versions of the Tesla Model Y, as well as all versions of the VW ID4 and the Ford Mustang Mach E now get the $80,000 cap (this fixes the previous inconsistency).

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