Tax Breaks To Get Charged Over

October 19, 2022

On September 21, 1893, the Duryea brothers road-tested the first gasoline-powered American car. They never could have guessed how their horseless carriage would define the 20th century. Automobiles transformed our landscape into a patchwork of strip malls and suburban cul-de-sacs. Detroit’s “Big Three” supported an apotheosis of blue-collar employment that let a high-school graduate raise a family on a single income – and retire with more security than today’s doctors and lawyers. Car culture even penetrated American song – where would Bruce Springsteen be without highways jammed with broken heroes on a last-chance power drive?

One hundred twenty-nine years later, the climate has changed, literally, and fossil fuels are a liability. In 2004, Tesla Motors rolled out the first street-legal electric car with enough range to be more than a novelty. Today, electric vehicles command 5% of the market for new cars and trucks, and Reuters estimates that by 2050, over half the vehicles on the road could be electric. Electric carmakers have spurred revolutions in solar energy and battery technology. Even pickup fans have long dreamed of a truck they could plug into their house. But how many of them guessed that when the power goes out, they’d be able to plug their house into the truck?

Uncle Sam is all in on electrification. In 2008, Washington offered the first electric vehicle credit limited to 200,000 electric vehicle sales per manufacturer. In August, the Inflation Reduction Act recharged that $7,500 credit for American-assembled electric cars. Eligibility tightens in 2023 — taxpayers earning up to $150,000 ($300,000 for joint filers) will be able to claim it for sedans costing up to $55,000, or trucks and SUVs up to $80,000, so long as battery components meet specific sourcing and manufacturing rules. (Structuring the incentive as a tax credit gives grounding to lawmakers who don’t want to be seen shoveling more money into Elon Musk’s already bulging pockets or backing the wrong horse like Solyndra.) There’s even a $4,000 credit for used electric vehicles costing up to $25,000.

Unfortunately, there’s one big buzzkill to the new credit – it’s nonrefundable. That means if your regular tax bill, minus any other credits, is less than $7,500, you lose the difference. You can’t even carry it forward to future years. That turns tax planning upside down for some electric car buyers with low tax bills. The challenge becomes finding a way to increase your taxes for the year you buy the car.

So . . . do you have appreciated stock in a taxable brokerage account? You can sell it – realize that gain to increase this year’s tax – then immediately buy it back. (Wash-sale rules don’t apply to gains.) That won’t save you anything now, but it will save you tax when you sell again later.

Alternatively, if you have money in a traditional tax-deferred IRA, you might convert enough of it to a Roth IRA to absorb the credit. This will eliminate future tax on the amount that you convert today, plus all the tax you would have owed on your future growth on it.

(Just as an aside, do you have one of those insufferable friends who won’t shut up about his Tesla? I’m not being sexist here – it’s always a him, not a her. Just casually ask him to “remind me again, you drive one of those little Priuses, right?” and watch him deflate right before your eyes.)

Here is this week’s bottom line. For over a century, buying a personal vehicle has been a personal choice with no IRS consequences. Electric vehicle incentives have changed that for many buyers and give you yet another reason to call us before you act. The good news is we’re here, and we’re ready to help!

Don’t hestitate to contact us.

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