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Are you mad the Inflation Reduction Act has made affordable EVs ineligible for the $7,500 tax credit? Read on to discover a loophole in the tax code.
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Last week, on April 18, the IRS officially raised the bar on the $7,500 EV tax credit. From now through 2032, you may qualify for up to a $7,500 tax credit on a new EV if the vehicle is assembled in North America and contains battery components and critical metals whose source is at least 50% and 40% North American, respectively.
In other words — if you’re looking for an affordable EV to use this tax credit on, you can basically buy a Chevy Bolt.
The Nissan Leaf and Hyundai Kona, two of the most affordable alternatives to the Bolt, are no longer eligible for the $7,500 credit. In addition, EVs produced by Genesis, Audi, BMW, and Volvo are also ineligible, making Volkswagen the only foreign automaker whose EVs qualify for the full $7,500 credit.
That’s a huge bummer, but it’s not all bad news: The IRS left a major loophole in its EV tax credit requirements, which, if exploited, could give you the full $7,500 on a new EV produced by one of the ineligible manufacturers mentioned above.
The leasing loophole
You could potentially get a $7,500 tax credit on EVs produced outside the U.S. if you lease the car and ask the dealership to reduce your lease payments by up to $7,500.
The Inflation Reduction Act contains tax credits not only for individuals but auto dealerships as well. Basically, the dealership may get up to $7,500 as a tax credit if its customers lease a new EV. The credit goes to the dealership but it can choose to pass the savings on to its customers as an incentive to buy.
Hyundai and Polestar are already offering significant discounts on leases. Hyundai will reduce your leasing payments by $10 monthly for 39 months, plus a significant reduction on your upfront payment. Polestar’s EV discount is significantly less — $3,750 — and it ends on May 2. Even if the dealership doesn’t advertise the credit, you could use this knowledge to negotiate better leasing terms on EVs.
Is it worth leasing an EV to get the tax credit?
For some car buyers, it can be worth leasing an EV rather than financing it or buying it outright.
Car leases are short, usually two to three years, so you don’t have to worry about buying a new EV that deteriorates or goes out of style faster than you build equity in it. Better yet, monthly payments on leases can be significantly less than those on a car loan. This can help you afford an EV you wouldn’t have otherwise been able to drive. You’re also not responsible for most wear-and-tear repairs, and you can exchange the car after the lease ends for another new EV.
The downside to leases — you don’t actually own the car. You’re paying the dealership to drive its car, and you can’t sell it to cash in on equity.
Since the car isn’t yours, you also have restrictions to follow. Typically, dealerships will let you drive leased cars between 12,000 and 15,000 miles per year. After that you may have to pay a fee for every mile you drive. You might also have to live within the state in which you leased the vehicle, or pay a hefty termination fee to break the lease.
If you’re okay with those restrictions, leasing an EV isn’t a bad idea. Auto companies are working hard to build EVs cheaply and produce them at a mass scale, which could bring down costs and make EVs more affordable when your lease is up. You can save on gas, and hey — getting up to $7,500 off your lease can make an already affordable monthly payment even more suitable for your budget and help you cover the cost of auto insurance for your EV.
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