Owning a car is a no-brainer for most people. You shop around, look for financing, and then purchase it. It’s yours, and, as opposed to leasing, eventually, you won’t have a car payment. But if you’re interested in an electric vehicle (EV), buying may not be the best option.
Inflation Reduction Act
Besides expanding the Internal Revenue Service (IRS), the Inflation Reduction Act addressed clean vehicles and home energy.Purchased Vehicle Tax Credit
Starting in 2023, you may have qualified for a tax credit of up to $7,500 when purchasing a new EV or FCV, according to the Internal Revenue Code Section 30D. This is a nonrefundable tax credit. That means it will lower your tax liability, but you won’t see any overage back in the form of a tax refund. And you can only claim one credit per vehicle.Used EV Tax Credit
If purchasing a used EV or FCV, you could qualify for up to $4,000 in tax breaks. The used car credit is limited to 30 percent of the car’s purchase price.This is also a nonrefundable tax credit and has income restrictions.
North American Assembly Required for New EVs
But with those tax credits comes another restriction when purchasing new EVs.One main stipulation to qualify for a tax credit when purchasing a new EV is vehicle sourcing. The new EV must have undergone final assembly in North America to be eligible, and at least 50 percent of its battery components must be made in North America.
This eliminates specific models that are eligible. As of April 2023, for example, some models, like the Tesla Model 3, are eligible for full credit, $7,500, while other vehicles, such as the Ford Mustang Mach-E, are eligible for only a partial credit of $3,750.
Nine vehicles, such as the Nissan Leaf, will not be eligible for any tax credit.
Leasing EV an Option
Leasing an EV may be a more viable option. It also may be a more affordable option, and you'll have more choices.Leased vehicles don’t come under the same North American sourcing rules as new EVs. Congress classified leased EVs as “commercial vehicles.” And under the law, these commercial EVs are exempt from the North American battery contents and manufacturing requirements.
This gives you more choices. For example, the low-cost Nissan Leaf, which doesn’t meet the new EV requirements, meets the leasing requirements.
This has spurred the number of people who are choosing to lease. In April 2023, almost 37 percent of EVs were leased.
Requirements for Leasing EV
There’s a catch to receiving the tax credit. It doesn’t go directly to you when you lease. The car dealer owns the tax credit, not you as the lessee. The dealer must agree to pass the $7,500 savings onto you.The savings you receive from the tax credit will be in the form of a rebate or a possible reduced lease price.
Leasing Has Advantages
The advantage of leasing the sometimes-pricey EVs is typically lower monthly payments. You’ll also have a lower down-payment.There will be a warranty on the vehicle while it’s in your possession, and you'll have access to newer EVs regularly.