Tax Credits as Point-of-Sale Rebates in the Inflation Reduction Act (IRS): New Mechanism to Provide a Buyer with a Financial Benefit

When Congress passed the Inflation Reduction Act they wanted the incentives to work. 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.

The tax credits for used electric cars will be accessible at the point of sale, through the same process as transferring the credit to the dealership. There is a lower income cap for the program, and some additional criteria for the vehicles.

A George Washington University study found that low-income car buyers preferred to get the credit as soon as possible.

Now, dealers can apply the credit at the time of purchase — effectively making it a discount — or provide the rebate to the buyer as cash. To apply the credit at the time of purchase, dealers will have to register through an IRS portal. Buyers will be required to confirm to dealers that they meet the income limits outlined in the tax credit rules before they can accept the rebate.

A dealer can provide a purchasing taxpayer with a financial benefit in cash or in the form of a partial payment or down payment for the purchase of the vehicle. The taxpayer does not have to file a tax return and claim a tax credit if they receive an immediate financial benefit at the time of sale.

This time will be different, the IRS promises. According to the guidance, most dealers will receive repayment for the rebate within 72 hours and will be able to track the progress in real time through an online portal.

New Vehicle Tax Credits and the Heads of Families: Impact of the Tax Credit Changes on Old-Vehicle Purchase Decisions

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.

One major concern is addressed by that. 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.

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.

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 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.

The changes will make a tremendous difference according to Elizabeth, the Vice President of the electric vehicle practice at 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.”