Recurrent is all about EVs, and especially used EVs. Used cars are on the road 3-4x as new cars, so the country’s electrification goals rely on getting more people comfortable and happy in used electric vehicles. We’ve been very excited supporters of the upcoming Used EV Tax Credit that was announced as part of the Inflation Reduction Act and we’re helping to guide shoppers with everything they need to know.
Below, find an eligibility checklist, followed by more general information about the used EV tax credit. We also have information on the changes to the EV Tax Credit for new cars and on all the federal support for EVs.
Use our checklist to determine if you’re eligible to claim up to $4000 off your taxes, then look at our list of frequently eligible vehicles. We’ll update this list monthly to reflect changing market trends and availability.
Are you eligible for $4000?
1. You can only use this credit once every three years, but it’s a new program, so everyone will be eligible January 1, 2023!
2. Income requirements: max adjusted gross income (AGI) of $75,000 for single filer; $150,000 for joint filers; $112,500 for Head of Household. You can check your AGI by looking at your previous year’s tax returns:
- Form 1040, Line 38
- Form 1040A, Line 21
- Form 1040EZ, Line 4
Note: the IRS has yet to release guidance on whether eligibility will be based on current year, or previous year AGI
3. Is this car purchase for personal, non-commercial use? We still don’t know exactly how rideshare driving and other small business uses will be considered under the IRA, but Recurrent is lobbying for those uses to remain eligible
What cars are eligible?
Many of the vehicles that are eligible for the used tax credit in 2023 will be older EVs with limited range, as well as plug-in hybrids. Curious if a cheap EV could work for you? Nervous about range restrictions but want a sweet, emissions-free ride?
1. Vehicles must be at least two models years old (2021 and earlier)
2. Vehicle must have a battery with at least 7kWh - that’s mostly all plug-ins!
3. Vehicles must be sold by a dealer
4. Vehicle cannot have already been used to claim this credit - again, this one is easy in 2023!
5. Vehicle must be less than $25,000. Here’s a few fully electric vehicles that are often sold below that price threshold, but you should also try to negotiate used car prices if the vehicle you love is too expensive!
- Early model Nissan LEAF (2011 to 2017) is under $15,000 with a range of 60 - 100 miles on full charge. Later model years are also sometimes available under $25,000.
- Fiat 500e (2014 - 2018) is under $20,000 with a range of 60 - 85 miles.
- VW e-Golf (2015 to 2018) is around $20K with a range of 70-85 miles.
- BMW i3 (2014 to 2017) is around $20,000 with a range of 65- 80 miles. With luck, you can find a 2018 for shy of $25,000.
- A 2017 or 2018 Chevy Bolt - it’s rare to find these under $25K so definitely grab this if you see it. Bolts generally have the cheapest cost per range mile, especially since they have all had their batteries replaced under the recall!
Current Market Trends
As of 10-28-22, these are the most commonly found plug-in vehicle listings priced under $28,000 - both battery electric and plug-in hybrids. Vehicles in this price range make up 17% of all inventory.
Overview: Inflation Reduction Act
The Inflation Reduction Act of 2022 was approved by the Senate on August 7, 2022, the House of Representatives on August 12, and signed by President Biden on August 16. It is a sweeping bill that adds prescription drug caps to the cost of medication for seniors, renews the affordable care act, imposes a minimum corporate tax, and reinvigorates incentives for and investment in clean energy. There were some significant compromises in terms of both tax reform and support for domestic oil, but climate advocates agree that is an important step forward to curb carbon emissions and help the US meet its Paris Accord goals. Estimates put the contribution of this Act at one billion tons of carbon avoided over the next ten years.
US National Used EV Tax Credit
US congressional leaders have agreed to a bill that would expand the existing $7,500 new EV tax credit while introducing the first federal tax credit for used EVs. Since the US added EV tax credits in 2010, no direct-to-consumer, federal assistance has been dedicated to used EVs.
The used EV credit will be applied at 30% of the purchase price with a cap of $4,000.
How the Used EV Tax Credit Works
The EV credits can be applied at point-of-sale starting in 2024, which is a major win for low and moderate income families who may not have the financial freedom to wait until tax season for incentives. The credit will also be issued as a percentage of the purchase price, rather than at a fixed amount.
The used EV credits would be limited to individuals with an adjusted gross income of $75,000, a head of household income up to $112,500, or joint filers with adjusted gross incomes of up to $150,000. EV purchasers are eligible for the used credit once per three years.
When Does The Tax Credit Take Effect?
The updated new and used EV incentives will apply to vehicles purchased after December 31, 2022 and expire December 31, 2032.
Which Used EVs Are Eligible?
All plug-in electric vehicles with batteries at least 7 kWh are eligible if they meet two criteria:
- The model year must be “at least 2 years earlier than the calendar year in which the taxpayer acquires” it, and
- The cost is under $25,000
Since the new bill proposes lifting the sales cap for eligible vehicles, the used EV credit will apply to Tesla and GM models that lost their eligibility in 2019 and 2020, respectively. It will also cover Toyota, which just hit the 200,000 vehicle cap this year.
Other restrictions include that the vehicle must be purchased from a licensed dealer for personal use, and each vehicle can only qualify for this credit once. The credit may be applied at time of sale by the dealer, which can be a great benefit for shoppers with tight budgets.
What Changed for New EV Incentives
There are a lot of structural changes to the tax incentives for new EVs, as well. We do a deeper dive below, but in short:
-There is no longer a cap on the manufacturer's sales, so Tesla, GM, and Toyota models can continue to get the tax credit for new sales.
-For electric sedans, hatchbacks, and cars, the MSRP when new must be under $55,000, while electric vans, trucks, and SUVs must have a MSRP under $80,000.
-Final vehicle assembly must now be in North America.
Starting in 2023, the $7500 credit is also broken down into two categories, based on source of materials, rather than battery size:
- $3750 of the credit will be applied if a percentage of battery critical minerals are sourced from the US or a country that has a free trade agreement with the US
- $3750 of the credit will be applied if a certain percentage of the battery source comes from the US or a country that has a free trade agreement with the US
Both of these material requirements open the door for growth in the battery recycling and material reuse industries, since US-recycled materials would count as US-sourced. Finally, the bill stipulates that final vehicle assembly must take place in the US.
What Will Tax Credits Do To The Used Car Market?
We cover the used EV market in our quarterly report. In the latest report, we found that used EV sales are growing as a percentage of total EV sales.
Recurrent CEO Scott Case commented on this after the introduction of new tax credits:
The used car market is twice the size of the new car market, so in a lot of ways this used EV credit is more important than the new EV tax credit over the long term. Many more future EV shoppers will be looking for used cars than for new ones, so this bill has the potential to help a lot more drivers.
The future certainty of both the new and used EV tax credits is really important. Norway's EV incentives are still going strong even at 80%+ of new sales. Long-term policies like this are the way to guide market transformation.
There are some interesting sharp corners in the used EV tax credit guidelines that will probably need to get sanded down: the abrupt limit at $25K creates some perverse pricing incentives (vs. a phase out price limit). Also, there is the fact that each vehicle can only be eligible for one used tax credit. Since many EVs are priced well above $25K and are holding their value quite well, it may take 3 or 4 sale cycles for a particular EV to be eligible for this tax credit.
It's also worth pointing out that the sub $25K market has the oldest vehicles with potentially the most variable battery conditions, so it's going to be super important for buyers to understand what they are getting in terms of the battery with those vehicles. Putting a tax credit on a cheap car whose battery is about to die doesn't help anyone, which makes Recurrent's used EV reports even more essential.
Who Wins Here?
Without getting too deep into nerdy economics, the biggest beneficiary of used EV tax credits may end up being the seller in each used EV transaction, for at least the next few years. The reason behind that logic is that there's not much elasticity of supply in the used EV market.
In other words, the market can't quickly ramp up supply in response to a lower effective price compared to the increased demand from buyers as a result of that lower effective price. So the impact on sub-$25K used EV prices of this tax credit is, paradoxically, may be a $4000 average increase.
The buyers aren't worse off. They end up paying the same amount as they would have before. But the seller ends up getting more for their EV when they sell. In the end, that flows through to a higher residual value for new EV purchases, so they are more valuable to buy when new.
This whole equation can shift over the course of the 10 year timeframe as used EV supply catches up with demand, but in any case, this policy will be effective in accelerating the EV transition.
Read more about all the tax credits included in the Inflation Reduction Act, and other federal programs to stimulate EV adoption.