​​3 Ways to Make the Most of EV Tax Credits

From taxes to insurance and maintenance, electric vehicles work differently from their gas-powered relatives. Much of the industry is still grappling with those differences, from manufacturers to sellers to car insurers. However, with a potential $7,500 on the table, there's a lot of incentive for new car buyers to learn the EV tax credit rules.

The great news is that you no longer have to wait until tax season to get your tax credit. You can claim the money from the dealership when you buy your EV. Let's dive into ways to make the most of the tax credits.

1. Understand the income restrictions

To qualify for the tax credit, you'll need to plan to use the car yourself and drive it on U.S. roads. Income-wise, the IRS says your modified adjusted gross income must be lower than:

• $300,000 for married couples filing jointly
• $225,000 for heads of households
• $150,000 for all other filers

Takeaway for making the most of EV tax credits

If your income is above the threshold, there is some wiggle room: You can choose whether you use your income from this year or the year before. As long as you earned less than the limit in one of the two years, you'll still qualify.

Another potential loophole? You might be able to lease instead of buy. Be aware that leasing often comes under fire from financial experts. This is because if you take out an auto loan to buy a car, you'll eventually own the vehicle. If you lease, you're making monthly payments to rent the car and will have to return it at the end of the lease period.

Leasing an EV may make sense for some people. In terms of EV tax credits, the income restrictions do not apply when leasing. Second, there's more flexibility in which makes and models qualify. According to Electrek, many leasing companies will pass some or all of the savings on to consumers. Plus, given how quickly EV technology is evolving, leasing an EV for a few years could also mean you're not tied to outdated technology.

That said, auto insurance can also cost more on a leased car, and you could be on the hook for termination fees if you want to get out of the lease early. Look at the costs and research the pros and cons of leasing.

2. The EV tax credit may be more refundable than you think

Unlike a refundable tax credit, which can give you money back, the EV is non-refundable.

Once your tax goes to zero, you can't go any further. For example, let's say you qualified for $7,500 in EV tax credits and owed $6,500 in tax. You wouldn't get the extra $1,000 back.

In theory, this makes it harder for middle- to low-income taxpayers to qualify for the full credit. However, the IRS guidance isn't cut and dry.

Takeaway for making the most of EV tax credits

Talk to a tax advisor, as you could still claim the full credit. When the IRS released updated information on the tax credit last October, it made an important change. Let's say you claim the tax credit from the dealer when you buy the vehicle. You then find your tax bill doesn't reach $7,500. The updated rules say that nobody can come back and ask you for the difference. So it's a non-refundable credit on paper, but that's not how it works in practice.

It's also worth considering a used electric vehicle. These can qualify for up to $4,000 in tax credits, and the prices have dropped considerably in recent years.

3. Know which cars qualify

Bear with me, here's where it gets a bit complicated. To qualify for the credit, a car first needs to meet basic requirements around battery life, weight, and cost, and be assembled in North America. On top of these come additional rules about critical minerals and battery components.

The Department of Energy says this is how the two halves of the $7,500 credit work:

• Critical minerals: To qualify for $3,750 in tax credit, 50% of the critical minerals need to be extracted or processed in the U.S. or a country with a free-trade agreement.
• Battery components: To qualify for $3,750 in tax credit, 60% of the components in the battery need to be manufactured or assembled in North America.

The percentages will increase each year, as the government wants the credit to stimulate EV manufacturing in the U.S.

Takeaway for making the most of EV tax credits

Go to the Fuel Economy website to see exactly which cars qualify. You may be surprised to learn it's based on the individual vehicle. According to Consumer Reports, even within the same make and model, there may be cars that qualify while others do not. Price-wise, the manufacturer suggested retail price (MSRP) has to be less than $80,000 for vans, sport utility vehicles, and pickup trucks, and $55,000 for other vehicles.

You can put the Vehicle Identification Number (VIN) into the Department of Transportation website to be sure the car you want is eligible. You'll need that number when you complete the IRS form to claim your credit.

Bottom line

Making the most of the EV tax credits might involve a fair chunk of research, both in terms of your tax situation and the car you buy. But that $7,500 can go a long way toward making an electric vehicle more affordable.