(Mikes-Photography from Pixabay)
Jesse Lore, Green Wave Electric Vehicles
For most Americans, their car is their largest or second largest asset (after their home), and because a car is usually a depreciating asset, how fast it depreciates has significant bearing on their owner’s financial wellbeing. Depreciation for internal combustion engine (ICE) cars is more commonly understood, but because EVs are relatively new to the market, the math around depreciation can be a little more confusing. In this article, we will try to clarify the biggest factor – tax credits – so that you can have a better understanding of how your electric vehicle’s value will hold up, as well as some tips to make sure that you can protect your investment.
The bottom line is this: electric vehicles depreciate by the amount of the tax credit that is available on that EV whether or not the purchaser is eligible for the credit or actually receives the credit. There is a lot of money at stake here, so before you purchase an EV, you should know (a) whether there is a tax credit available on the car you want to buy; (b) whether or not you are eligible for the tax credit; and (C) how your car’s value is affected.
The Inflation Reduction Act of 2022 provided a huge boost to the electric vehicle industry by updating the federal tax credits available to EV purchasers. New for 2024, some new electric vehicles can get up to $7,500 off, and used electric vehicles can get up to $4,000 off at point of sale. The dealer must participate in the IRS clean vehicle tax credit program in order for you to use that tax credit when you buy the vehicle. You can learn more on the IRS website, and see which vehicles qualify on FuelEconomy.gov.
Now there are important limitations to these credits. For new vehicles there are sourcing and manufacturing requirements for the EV battery, and there are income limits for the purchaser for new vehicle and used vehicle credits. There is a $25,000 price limit on tax credits for used EVs as well. A vehicle can only receive each tax credit one time and if the purchaser does not receive the tax credit, the next purchaser is not able to receive the credit either. This last one makes intuitive sense for new vehicles. Once the vehicle is sold when it is new, it is now a used vehicle, so it would not qualify for a new vehicle credit at any subsequent sale. But for used vehicles, any electric vehicle that was purchased after August 16th, 2022 as documented on the vehicle history report (e.g. CarFax) is not eligible for a Used Clean Vehicle Tax Credit on any subsequent sale, regardless of whether it was purchased previously for $25,000 or less.
Let’s talk about new vehicle depreciation first, and take the example of a 2023 Volkswagen ID.4 Pro S all-wheel drive, with an MSRP of $54,090 including delivery. This vehicle qualifies for the full $7,500 new EV tax credit, so if you purchase it from a dealer who is participating in the IRS point of sale program, you will only pay about $46,590 plus taxes and fees. But if you are fortunate enough to make more than $300,000 per year (the IRS income limit on this credit for married taxpayers filing jointly), then you not only don’t get the tax credit, but your vehicle depreciates by $7,500 as soon as you take ownership. That is because second owners, who you would sell your vehicle to, would compare the price at which they could buy your vehicle with the price of a new one. So, if you put 1,000 miles on your ID.4 and decided to sell it, the most money a rational purchaser would pay for that car is less than $46,590 (the sale price minus the tax credit). This income limitation impact to depreciation also applies to the used clean vehicle credit, but the income limits are half of what they are for new vehicles.
For used vehicles, the problem of depreciation is even more complicated. Let’s take that same ID.4. If you purchased that vehicle in May 2022, drove it for 15,000 miles and sold it to someone else in 2023 for $35,000, the vehicle will never qualify for the Used EV Tax Credit under current law, because it was already transferred to another purchaser after the passage of the IRA. Compare that vehicle to an identical vehicle (call it “Vehicle B”) that someone bought new at the same time but drove it for three years and 45,000 miles, and then sold it. Vehicle A (same mileage and condition as vehicle B) is no longer eligible for the tax credit, but vehicle B is still eligible (because Vehicle B was not transferred to a qualified purchaser after passage of the IRA). So, if vehicle A is worth $18,000 at this point, vehicle B is worth as much as $4,000 more because it is still eligible for the Used Clean Vehicle Credit… provided that the dealer to whom you sold the vehicle can still offer the vehicle for $25,000 or less.
There are still a lot of unknowns with the new Clean Vehicle Tax Credit program. According to the IRS, for a vehicle to qualify, the dealer must report the sale to the IRS, according to the IRS website. So, if you buy an EV from a dealer and you don’t get the tax credit at point of sale, you may not be able to claim that tax credit on your taxes the following year. That is a double-whammy: you don’t receive the tax credit AND your vehicle depreciates by the tax credit amount!
Buying an EV is more affordable than ever before, and owning an EV is the most affordable of any type of vehicle, with less cost for fuel, maintenance, and repairs. Also, you get a more fun car that helps you save the planet! But you have to be savvy when it comes to tax credits when you buy the vehicle, and work with a dealer that understands these credits and can get them to you at point of sale. Otherwise, one of your most valuable assets could lose more value more quickly than you expect.
Jesse Lore is the owner of Green Wave Electric in Hampton, NH.
To see this article in its print form, as a pdf file, please click HERE.
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