Getting A $7,500 Tax Credit For An Electric Car Will Soon Get A Lot Easier

Getting a federal tax credit for buying an electric vehicle is about to get a lot easier — or at least, a lot faster.

Starting in January, EV car shoppers won't have to wait until tax season to pocket the incentive, worth up to $7,500. Instead, the credit will be available as cash in hand on the day of purchase — and it'll be available regardless of the size of a customer's tax bill.

That's how Congress wanted these incentives to work when they passed them as part of the Inflation Reduction Act. But when it was rolled out last year, it still required EV buyers to claim their credit when they filed their taxes, a more burdensome route. That's because the IRS needed time to come up with a new system to make the credits work as point-of-sale rebates instead.

That new system to claim the credit was announced Friday. Here's what to know.

It's all meant to happen at the dealership

All the requirements for qualifying for the tax credit still apply — for both EV buyers and automakers.

That means there's still an income cap for buyers and there are limits to how much cars can cost to qualify for the credit. And not all models from automakers will qualify because of complex rules about how the cars are produced, including where the battery components come from.

But for buyers who qualify, actually accessing the credit will be a matter of extra paperwork at the dealership, instead of a monthslong wait for savings delivered through the tax filing process.

Dealers will register with the IRS and confirm that a vehicle qualifies for the tax credit, using the vehicle identification number.

That addresses one major customer concern. As of now, buyers have to do a lot of homework to figure out whether an EV they want to buy would qualify for a tax credit — navigating through a myriad of complicated and shifting rules.

President Biden puts on his mask after signing the Inflation Reduction Act of 2022, in the State Dining Room of the White House in Washington, DC on Aug. 16, 2022. The massive law included a complicated tax credit for electric vehicles.

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Mandel Ngan

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AFP via Getty Images

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Delivering money faster — and to more people

Buyers will also now have the option to get the credit instantly instead of waiting for the next year's tax season.

Those purchasing an EV would need to attest that they meet the individual requirements — like that they're purchasing the vehicle for personal use, they're not a dependent on anyone's taxes, and they're under the income limit.

Then they'd transfer the tax credit to the dealership, and in exchange, the dealer will either give them that much in cash or as a down payment toward the vehicle. The dealer will submit documentation to the IRS, and the IRS says dealers will be reimbursed "promptly" — within 72 hours or so.

Significantly, a buyer taking the credit at the dealership can get it regardless of what their tax bill is that year. Previously, a buyer would need to owe $7,500 in taxes in a given year to get the full benefit of the credit.

That functioned like an income minimum, since many low- and middle-income families owe less than that in taxes. It was also just another headache for people trying to figure out how much the credit was actually worth to them.

Now, even families with no tax liability at all can get the tax credit.

Meanwhile, tax credits for used electric vehicles (worth 30% of the price of the vehicle, up to $4,000) will also be available at the point of sale, through the same system of transferring the credit to the dealership. There is a lower income cap for that program, and some additional criteria for the vehicles.

There are caveats, though

Things can still go wrong. The IRS says there are provisions in place to prevent fraud and deception on the part of dealerships, and dealers can only participate in this program if they're current on their own taxes.

And there's one concrete situation where taxpayers may need to give back the credit.

Buyers can qualify under the income cap using either the current year's income or the previous year's, whichever is lower. If it turns out their income was over the cap in both years, and they already received the tax credit through a dealership, they would need to repay the tax credit to the IRS.

The income limits for a new vehicle are $150,000 adjusted gross income for an individual, $225,000 for a head of household and $300,000 for a married couples filing jointly or surviving spouses.

For a used vehicle, the income caps are $75,000 for an individual, $112,500 for heads of households, and $150,000 for married couples filing jointly or surviving spouses.

The new system could make a big difference

Though this will simplify things for EV shoppers, the tax credits still remain complicated as the government juggles both encouraging people to buy EVs while also pushing car companies to move more of their supply chains to the U.S.

But a point-of-sale rebate should at least make the credits less of a guessing and waiting game.

The changes "will make a tremendous difference," says Elizabeth Krear, the vice president of the electric vehicle practice at auto data giant JD Power. "That's $7,500 right there at the time of the transaction — versus having to finance at a higher price, which increases the monthly payments, and then waiting for that tax rebate down the line sometime in April."