Electric vehicles (EVs) have become increasingly popular in recent years due to their environmental benefits and cost savings on “fuel,” among other reasons. However, the upfront cost of purchasing a new EV can be prohibitively expensive for some consumers. As a result, many people opt to purchase a used EV in order to take advantage of the cost savings and still enjoy the benefits of driving electric.
My colleague Steve Hanley covered the basics of the Used Car Tax Credit in this article published a month ago and quoted below:
“The new law also provides a $4,000 tax credit for qualifying used cars. Once again, the credit is only available for transactions that take place between a buyer and dealer. The final assembly, battery materials, and battery components restrictions do not apply. However, there are limiting factors.
- The sale price must be less than $25,000.
- It must be more than two years old.
- It only applies to the first sale from new.
“For a complete list of the 15 cars Leaf Score thinks will be eligible, follow this link.
“There are eligibility criteria for the buyer as well as the EV. Under the new rules, you can only claim the used EV tax credit once every three years. There are also income limits. Taxpayers filing singly are limited to an income of $75,000 or less in the year of purchase or the preceding year. For heads of household, the income limit is $112,500. For joint filers or a surviving spouse, the income limit is $150,000.”
The Fine Print
Below are some of the requirements I have found that drive me a bit crazy. Here is a link to the IRS website to the recently updated page with the details.
- Your income has to be “just right” to get the full credit. A single taxpayer needs annual income of about $50,000 or so to have enough income to use a $4,000 tax credit (which is not refundable and can’t be carried forward or back to other tax years). But it can’t be higher than $75,000. Luckily, the second limitation can be met in either the year you buy the vehicle or the preceding year. If your income is too high, you lose the whole credit, but if your income is too low, you just lose a portion of the credit. For married couples, the range is much broader. You need combined annual income of about $65,000 to use the full credit, and you can have income of up to $150,000 as stated above.
- You don’t get the credit until up to 15 months in the future, when you file your taxes. So, you may have to take a loan out on a higher amount and pay interest on that money for 15 months (or the life of the loan if you don’t pay down your loan when you get the tax refund).
- You can only buy from a licensed dealer (I’ve found the best used car deals come from buying from a private seller).
- You can only get the credit if the manufacturer has submitted the paperwork for your make and model. There are already a few Tesla vehicles that dealers are selling for less than $25,000, and as time goes on and cars depreciate more, more Tesla cars will be sold below that amount. But since neither GM nor Tesla have submitted their paperwork for their cars, the buyers can’t get the tax credit yet. Hopefully, they will do that soon, since the Chevy Bolt and the Tesla Model 3 are two of the most popular electric vehicles sold over the last 5 years. The Nissan Leaf and a host of plug-in hybrids are already eligible.
- Plug-in hybrids are eligible for the credit, just like fully electric vehicles. Some people think that isn’t fair. It doesn’t really bother me.
My Analysis Of When Used Model 3s Will Be Under $25,000
Looking at the prices of the cars, it appears that the Model 3 only loses about $1,500 for being a year older and having another 12,000 miles on it. If I was to just use this information to make a judgement, I would say it will be another 8 years of $1,500 reductions before the average 2018 Model 3 is available for under $25,000. At that rate, the market is implying Tesla Model 3s will last for over 32 years ($48,190/$1,500 > 32). This is crazy, but the market is distorted. Consider the following factors:
- The new Model 3 is getting the $7,500 tax credit on January 1st, so the price should come down on used vehicles by a similar amount. That should take the average 2018 price from $37,287 to just under $30,000.
- As I mentioned in my article a few days ago, Tesla is massively expanding production in 2023 and Elon has stated he realizes that to sell more cars into a soft economy, prices will need to drop, and he has stated he prefers volume over margins and profit — in accordance with Tesla’s mission to accelerate the transition to electric vehicles. I expect prices on new Model 3s to gradually drop between $5,000 (if the economy is only a little weak) and $10,000 (if the economy is very weak) over the next year or so.
- As Tesla vehicles come out of their warranties at 4 years/50,000 miles and their powertrain warranties at 8 years and 100,000 miles, I expect prices to drop a couple thousand.
- You as a buyer don’t need the average price to be below $25,000. You just need the one car you are buying to be below that amount. So, you don’t have to wait as long if you shop around.
In light of those 4 factors, I’m expecting some lucky Tesla Model 3 buyers to get the $4,000 used car EV tax credit sometime this year, as long as Tesla doesn’t drag its feet in submitting the 2017, 2018, 2019, 2020, and 2021 Model 3s to the IRS. When Model 3s are available at $25,000 and the buyer gets a $4,000 tax credit, the net cost is $21,000. That is a great price for a great car!
Overall, the used EV tax credit is a great way for consumers to save money on the purchase of a used electric vehicle and still enjoy the benefits of driving electric. If you’re considering purchasing a used EV, be sure to check if you’re eligible for the credit and how to claim it on your tax return. Although the new law has more limitations than I would like, it should allow some people to afford electric cars earlier than they would be able to without the law.
Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], XPeng [XPEV], and Hertz [HTZ]. But I offer no investment advice of any sort here.
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Source: Clean Technica