Eligibility Rules Limit Benefits of Used Clean Vehicle Tax Credit

The Inflation Reduction Act provides a new federal tax credit of up to $4,000 for the purchase of a used electric vehicle, but problematic eligibility rules will limit the environmental benefits of the incentive. Only a small percentage of used EVs are expected to qualify, and many taxpayers will find that they are ineligible. The new regulations will also allow inefficient plug-in hybrid electric vehicles (PHEVs) to qualify for the credit, undermining the incentive’s primary environmental objective.

In order for a used EV to qualify, it must be at least a two-year-old model and cannot cost more than $25,000.The Internal Revenue Service provides an exhaustive list of used EVs that might be eligible, but the price cap is expected to disqualify most of them. The vast majority of battery electric vehicles (BEVs) on U.S. roads are Teslas, and you have to go back to model year 2016 before used Tesla prices start to drop into the qualifying range. The more affordable Model 3 did not appear until 2017, and most used versions currently available cost at least thirty grand.

The list of eligible vehicles includes PHEVs. Unfortunately, many hybrids with plug-in capability do not deliver significant carbon dioxide reductions. Any PHEV with a 7kWh battery or larger now qualifies as a “clean vehicle”, but this specification does not guarantee low tailpipe emissions. The legislation fails to impose a minimum milesper-gallon requirement, allowing some of the dirtiest gas-burning PHEVs to qualify for the exact same tax benefits as the cleanest BEVs.

An online search quickly reveals which used EV models fall below the $25,000 price threshold. Many are small BEVs, and the popular Nissan Leaf is especially well represented. Most BEV listings are low-range models that have primarily been driven close to home, and these tend to have low miles recorded on their odometers. Those approaching $25,000 include more recent models that can travel over 200 miles on a single charge. Charging speeds have improved dramatically in recent years, so older BEVs will spend considerably more time at public charging stations. The tax credit might look reasonably attractive to middle class motorists who have access to home charging and only intend to use their BEV for local driving.

Not all taxpayers are eligible to receive the credit. The legislation imposes income limits that disqualify taxpayers with modified adjusted gross incomes above $75,000. The limit is $112,500 for heads of household and $150,000 for couples filing jointly. An existing rule will also limit the availability of the credit to some low-income taxpayers. The incentive has always been a nonrefundable credit that cannot exceed the amount of income tax owed to the federal government. It cannot generate a refund, and the unused portion cannot be collected the following year. If, for instance, an EV model qualifies for the full $4,000 but the buyer’s tax liability that year is only $1,200, the credit is only worth $1,200. Many low-income motorists have no tax liability whatsoever and cannot benefit from the credit at all.

The restricted availability of the new incentive is hard to justify, given the fact that the $7,500 Clean Vehicle Tax Credit for new EVs uses income thresholds that are twice as high and will subsidize EVs that cost up to $80,000. Sadly, gas-burning PHEVs with poor fuel economy will qualify for both tax breaks.