If you pay federal income tax, drop what you’re doing and call your local Mini dealer and order a Mini SE right now. I just did. I chose a green one with a sunroof delete.
Kind of a bold claim, right? Allow me to explain.
Disclaimer: I am not a financial professional. This is not financial advice. I am just a guy with a business degree who reads blogs and sometimes writes them. Consume this information at your own peril.
As the law currently stands, there is an up-to $7500 Federal Tax Credit for the purchase of a new Electric Vehicle. For the sake of brevity, we will skip over a list of which vehicles qualify for the full amount, but the long and short of it is this: Tesla and GM currently don’t qualify because they made too many EV’s. Plug-in hybrids usually only qualify for a smaller amount. Pretty much all other fully electric BEV’s qualify for the full amount. Leasing a vehicle won’t get the leasee a credit but it will earn the vehicle owner (the dealership) a credit.
But I don’t pay any federal income taxes. I even got a check this year from the IRS! Well, it’s true that a lot of Americans do not have to pay federal income taxes. This federal tax credit does them no good whatsoever (which is why the law will likely soon become a point-of-sale refund instead of a tax credit). However, check your pay stubs and you might see “federal income tax withholding” taken out of every one. Depending on your IRS form W-4, a certain amount of federal income tax comes out of every pay check. Often, the sum of withholding throughout the year exceeds the amount of tax you actually owed for that year, so the IRS sends you a tax refund (often called a tax “return”). Sad epiphany: it’s not a gift from the IRS. You simply made an interest-free loan to the IRS for a year and they kindly gave you your own money back. Sadder epiphany: not only did you not earn interest on it throughout the year, but due to inflation it now has less buying power than when you lent it to the IRS at each paycheck.
So where does the EV federal tax credit come in? It’s a “non-refundable tax credit.” It is not a deduction, which only decreases your taxable income. It’s a full-on credit. If you owe $7500 in federal tax, and have a $7500 credit, you now owe no federal tax. Pretty great. The “non-refundable” term only means that if you only owe $1000 in federal tax, but have $7500 (or more) in credits, the credits are only worth the amount you owe and nothing more.
What’s important to note here is that even though the credit is “non-refundable,” it can very much end up in your bank account in the form of a tax refund. The definition of “owe” here comes down to IRS form 1040, line 24. This is your “total tax,” and is very different from the amount that you owe (or are refunded) after filing your taxes. That amount after filing is the difference between your withholdings and your line 24 total tax. So, for example, if you owed $10,000 in federal tax on line 24, but your withholdings for the year were $11,000 out of your pay checks, then you would receive a refund for $1,000. Likewise, if your withholdings were only $9,000, you would get a nice letter from the IRS saying you owe them an additional $1,000 plus interest! Funny how they don’t give you interest when you over-pay on withholding, but do charge you interest when you under-withhold.
You can reduce your line 24 “total tax.” Most people do this by having children or other dependents. A much more economical way is to buy a new EV. Despite their newfangled technology, they require much less maintenance than human children. The destination charge is much less than what a hospital birth costs. Even the insurance for EV’s costs less than human insurance. You’ll use form 8936 and 1040 schedule 3 to reduce your total tax by up to $7500. If your withholdings already covered your tax liability before the $7500 credit, then the $7500 will very much end up as a tax refund paid to you after filing. Turns out that it isn’t so non-refundable after all.
Who does this benefit? People who earn enough to owe federal income taxes, but don’t have any of the traditional deductions or credits to offset them. This person is probably paying above-average federal income tax if she lives in a state with no state income tax like Florida, for example, where you can’t credit any state income taxes in order to reduce federal taxes. This person doesn’t have any dependents, and is either single or is married filing separately, or if filing jointly their spouse also owes considerable federal income tax. This is especially beneficial if you have a low debt-to-income ratio and excellent credit, because then you can reduce the amount of on-hand cash and interest payment required in order to reap the tax benefit of the EV purchase.
Seems too good to be true. Free money for buying an EV? It’s not. This is your one fleeting chance to stick it to The Man by buying a fun car. At least it isn’t too good to be true yet, but it probably will be soon when the law is re-written. It does feel like the benefits of the credit are not well-known, and are somewhat obfuscated by the term “non-refundable” since nearly no salaried employee actually has to write a $7500 check to the IRS after filing. I think most people believe that “non-refundable” indicates they can’t get the $7500 back as a tax refund.
What’s to stop me from buying two cheap EV’s and getting $15,000 in federal tax credit? Nothing. Literally nothing is stopping anyone from buying as many EV’s, and associated tax credits, as their hearts desire. The non-refundable part here simply means that at some point you’ll max out your liability, but for well-paid professionals, one could conceivably buy a small fleet of EV’s before running out of tax liability. The only requirements are listed on Instructions for Form 8936:
• You are the owner of the vehicle. If the vehicle is leased, only the lessor and not the lessee, is entitled to the credit.
• You placed the vehicle in service during your tax year.
• The vehicle is manufactured primarily for use on public streets, roads, and highways.
• The original use of the vehicle began with you.
• You acquired the vehicle for use or to lease to others, and not for resale.
• You use the vehicle primarily in the United States.
Conceivably, as long as the car is placed in service (i.e. registered and insured) and actually driven some, you could enjoy your EV for a relatively short time (let’s say a year) and then trade it in or sell it, having dutifully earned your tax credit. If the vehicle depreciates less than $7500 over your time of ownership, you will have essentially owned the car for that time period for free.
Are there any other sweet rebates or credits for EV’s? You betcha. My local utility company is starting up a program to offer rebates on power used at night (when stress on the grid is lower) to charge the EV. Basically, they’ll pay you to schedule your charging for certain hours. On top of that, there is currently a $1,000 federal rebate for getting a charger installed at your home.
My 2022 Mini SE is slated for delivery in December ‘21, just in time to take advantage of the credit for the 2021 tax year. If the law remains in place, I just might buy another one next year! I’d like to start a Spec Mini SE sprint race series with all my friends, if possible.