Ep. 61 | Used Clean Vehicle Tax Credit (personal)
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Speaker 2:Welcome back to the podcast, everybody. Today, episode 61, we are gonna have a great show where we look at, for the first time ever, I believe the first time ever we've ever even dove into this at all, it's the used clean vehicle tax credit. That's right. It's for personal use, but used, sometimes referred to as pre owned, clean vehicle tax credit. So what does that mean?
Speaker 2:You're about to find out, but before we do that, let's take a moment as always and thank our sponsor.
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Speaker 2:Obviously, you've seen it in the show title. You read it in the description. You heard it in the intro, but but I'm gonna reiterate it. Today, we're talking about used clean vehicle credits. That's right.
Speaker 2:Used clean vehicle, used cars, previously owned, new to you, whatever you wanna call these things. We're talking about clean vehicles. So that's your your EVs, your Teslas, your, I guess, hybrids. Maybe we'll talk a little bit about it here. I don't know if that qualifies, but I'm bringing on the man as always that has all the answers to all my ridiculous questions at times.
Speaker 2:So, Chris Pacquero, welcome back to the show, my man. What's happening? Oh, it's great to be back. And, well, John, you might have some crazy questions once in a while. Yet the answer to almost all the questions
Speaker 4:in the tax world is it depends.
Speaker 2:Right? That's like asking somebody on a date, and they're like, you know, can I get back to you a little bit? But I get it. It makes sense. Right?
Speaker 2:Everybody's situation's different. So this topic, I'm personally excited about. Obviously, I mean, you're from Michigan too. So we see, you know, vehicles, new, old, and everything in between, kinda rolling around the streets. Chris, I don't even know if you know this about me.
Speaker 2:I know we always share a lot of weird stuff, but, you know, I actually went to college for one of my first college degrees on upper engine performance. So literally to reboot cylinder heads and intake manifolds for race cars.
Speaker 3:I don't
Speaker 2:know if
Speaker 4:you knew that. I didn't know that, and that's very interesting. You're a you're an enigma. And, we
Speaker 2:hear It's better than an annoyance.
Speaker 4:We have a, from what I've heard, a pretty prestigious school in the automotive world here in Nashville, called Nashville Auto Diesel College. This is what I'm saying. This is what I've heard. So I can imagine. A clean vehicle just meant that you actually got a detail.
Speaker 4:That is that would qualify for that would be nice.
Speaker 2:I know my wife doesn't listen to this, but I wish I did that every once so I take the leaf blower too and blow out the kid Cheerios. There you go. There's our clean vehicle. But so this topic is really interesting to me. Right?
Speaker 2:Because it almost well, we won't get I won't get it all the details. Obviously, we'll we'll do this with some form of format, but it's very interesting because now we're talking about used clean vehicles. So if I say EVs instead of clean vehicles, we're not just pigeonholing EVs, but now these have been out in the market for some time. Right? So the opportunity now to purchase a used one now is an option for people where, you know, I remember when Tesla was just getting fired up, you know, using that for for one example.
Speaker 2:And there were no used ones out there because everybody could only find you find new ones. Right? So, Chris, to you, at first glance as a CPA, tell us a little bit about this. And then I know there's some caveats, if we will, within this new credit from the IRS. So give us kinda your your overview on what we're looking at here with this.
Speaker 4:Well, there are some caveats. And to set the stage, there has been a clean vehicle. There's some interchangeable terminology, but let's just say clean vehicle for purposes of vehicles that are either electric or hybrid. There's been a credit for those vehicles for quite a few years, but it was always limited to new vehicles, and there was limitations based on how many were manufactured. Starting here in 2023, under the Inflation Reduction Act, a lot of those things changed.
Speaker 4:We have a new new v clean vehicle credit. We have a new commercial clean vehicle credit. And guess what, guys? We'll do some podcast on those in the new year. So I know you're at the edge of your seat for those.
Speaker 4:But we wanted to escalate the used clean vehicle credit because this is the first time you would be you are taxpayers are eligible to receive a federal tax credit for purchasing a used vehicle. You're gonna hear, you know, you're gonna hear previously owned out there, but we're just gonna use the term used. So beginning January first of twenty twenty three, if you buy a qualified used electric vehicle or fuel cell vehicle from a licensed dealer for $25,000 or less, you might be eligible for this tax credit. The credit is 30% of the sale price with a maximum credit of up to $4,000. So what that means, John, is if, let's say, you bought an eligible EV and it was $20,000, 30 percent of $20,000 is 12 thou no.
Speaker 4:30% of 12 is $6,000. I'm not good with numbers, Jen. By the way by the way, whenever I play pickleball, I you know it had to come I usually say There it is. Went wrong at one point in the game because I'm a little bit of an intense player, and my running joke is, sorry, I'm not good with numbers. Now, though my friends that I play with know them in account and they just chuckle it off or they roll their eyes and say it's a dad joke.
Speaker 4:But for people that don't know me, they're like, Yeah, I understand. And I just, but It's a little man. So the credit would be $6,000 30 percent times $20,000, yet the maximum credit would be 4,000. So you would be eligible for a $4,000 credit, but there are some limitations. It's it's because that is a nonrefundable
Speaker 2:credit. And and so, Chris, really, it's you know, let's if we pump the brakes, you know, pun intended. There's my dad joke. I don't have a pickleball joke, but baby. But I do have that one.
Speaker 2:So, basically, what you're saying here so far is that, and this is only for household. So for personal use. Right? This is not for businesses at all that we know of. Is that correct, or is that one thing that's so kind of out there?
Speaker 4:Well, this credit under IRC, internal revenue code section 25 e, is for personal used personal use clean vehicle credit or, used clean vehicles. Now remember, there is a new commercial vehicle credit. Now that doesn't mean this the vehicle that you purchase as a personal vehicle couldn't have a portion, of of business use. So may maybe you're a free you know, maybe you're you have some business miles and you you drive a couple thousand miles, you freelance and you you have home office deduction, you have a thousand miles or 500 miles, you can still take the mileage deduction, but this this is a credit for a personal used vehicle.
Speaker 2:Now I'm actually, what you just said there, you know, this is how your brain works, and I know it. Right? Like, you just said something really important that you probably didn't even realize how many people that appeals to. And, really, what you said there, right, is there is a difference between really who the vehicle is registered to, if it's registered to a business, if it's registered to an individual, but I I I won't well, maybe it's a loophole. I don't know if that's the right term for it.
Speaker 2:But like you just mentioned there, if you're if you're able to take the mileage on that, that appeals to a whole another audience. Right? So that's I I know you just kinda rattle these things off, and you you know, you that's how your brain your brain's ticking. Things are just coming out. But I think that's a great point to make, and I wanted to reiterate that just so people understand that for, say, self employed.
Speaker 4:Right. Exactly. So if you're self employed and you buy a used clean vehicle and it's in your personal name and it's a personal use vehicle, there might be some business use. You can still be eligible for this credit. Now that's where it gets tricky because the credit is nonrefundable, and I'm sure everyone listening to this podcast already listened to our podcast about solar credits and how home home home
Speaker 3:of course Of course I did.
Speaker 4:But just in case you didn't, what that means is that a nonrefundable credit only only applies if there's an actual tax due. So if your total so, John, let's say you bought the $10,000 $20,000 vehicle, multiply that by 30% is 6,000. The maximum credit's 4,000, but your tax is $3,000, then you can only use $3,000 of the $4,000. Meaning, this this this vehicle credit can't be more than your actual federal income tax, but it can wipe it out. That what that's what nonrefundable means.
Speaker 2:So, really, this is pretty limiting for the most part on on who could really take advantage of this too. And then also, you know, something else you mentioned there earlier on that's pretty important is it has to be from a licensed dealer. You know, you can't be on Facebook marketplace, buy a used vehicle that's $19? Like, it has to come from a licensed dealer, not a private seller. Correct?
Speaker 4:Correct. So let's talk about what the so we're gonna talk about what the qualified vehicle and sale looks like, then we will shift gears Oh, okay. And talk about who who qualifies. So I like it. The sale has to qualify, and the and the purchaser has to qualify.
Speaker 4:So let's talk about the actual vehicle. The vehicle has to be has a have a sale price of $25,000 or less and that includes all dealer imposed costs or fees not required by law. If it doesn't include a cost or fee required by law, such as taxes or title or registration. So it doesn't include sales tax, title, and registration. So the point is, if the sale price is $26,000, but 3,000 was title and registration fees required by law, you still qualify.
Speaker 4:The vehicle has to be a model year at least two years earlier than the calendar year when you buy it. So the IRS uses an example. A vehicle purchased in 2023 would need to be a model year 2021 or older. The vehicle has, had not already been transferred after 08/16/2022 to a qualified buyer. The vehicle must have a gross weight rating of less than 14,000 pounds.
Speaker 4:It has to be an eligible plug in EV with a battery capacity of at least seven kilowatts, which, again, we're not trying to get too technical on this podcast. It has to be primarily used in The United States. The point is, you're deal the dealer, and you, Jenny, made a good point. It has to be purchased from a dealer. It can't be purchased, John, from your cousin, Vinny.
Speaker 2:I wouldn't if I had a cousin, Vinny, I don't know if I'd trust him anyways. Said if I did have a cousin Vinny, I don't know if I'd trust him anyways. You know? I I probably be selling you an EV without a battery or something. Who knows?
Speaker 2:Well, so so the vehicle has come from a from a dealer,
Speaker 4:and the dealer reports that sale to the IRS. So you the IRS is gonna find you know, have some type of report to match up most likely the VIN number and your Social Security number. If you're concerned about do you have a vehicle that qualifies, the dealer is going to know, not that all the dealers are the most trustworthy individuals in the world. You can go to fueleconomy.gov and check to see if the vehicle you're gonna purchase is eligible. And, John, we're gonna put a link to that in the, in the podcast notes.
Speaker 4:Absolutely.
Speaker 2:Absolutely. And and as, you know, as the IRS starts to, you know, rev up Here's another one of my dad jokes. Yeah. You know, rev this up a little bit, and the market we won't necessarily say whatever becomes saturated with vehicles that would qualify for this. But, again, as we mentioned a little bit earlier, you know, we got into a bit, there are these limiting factors.
Speaker 2:I mean, this is coming from a from a gear head, you know, like myself is, you know, I've and I'm I'm literally pulling this out of the air, so there is no please don't fact check me because I already know that I'm gonna be wrong here. But, you know, thinking of a Tesla, for example, I believe that the average lifespan of a battery in those is about seven, eight, nine years. So, I mean, of course, we're getting past the, you know, three year here, but the cost of replacement is very significant. If I remember, I we had a we had a buddy down south who I I wanna say they spent, like, 7 or $8,000, maybe even more out of pocket just to replace a high mileage battery on one from our earlier year. So kinda consider that.
Speaker 2:Right? If you're, you know, weigh your options, I think when when approaching this is, you know, is the credit worth it? But, obviously, looking at potential repair costs based on that because it is I mean, I could tell you another example. You know, somebody gets in a in a fender bender with not to talk about Teslas all day long, but I know there's example. They waited over a year for a new bumper because there's no there's no parts Right.
Speaker 2:For them. So there's considerations to be made.
Speaker 4:And that's why for for the right buyer, we talk about, you know, in teaching tax flow, the three laws. Tax laws are written to encourage and incur discourage certain behavior because tax agencies are your involuntary business partner. The intent of this law is to help and encourage certain segments of of society to buy an electric vehicle. Maybe those are people that couldn't afford to buy a brand new, EV. Hence, the $25,000 or less sales price.
Speaker 4:Challenges, there aren't that many vehicles, dollars 25,000 or less, that are three, four years older, so now you're looking at a much older vehicle that might have some, that might have some deferred maintenance. It's like your your ministry.
Speaker 2:Mhmm. So then, hopefully, as time passes by, right, they would, I mean, hopefully, I mean, I had I'm full of jokes here. I just thought of another one. You know, as the IRS may go the extra mile. And, with this, you know, maybe they'll open it up or realize, you know, kind of the implications of this.
Speaker 2:But I know we talked previously. Right? Like, these factors, again, is is not meant for everybody. It's all public information. So everything we're talking about out there, I mean, it's an easy reference.
Speaker 2:Obviously, you can fact check that. But I know, Christy, you had some other, you know, other components of this that we did definitely go into.
Speaker 4:And that's something to consider. We're not sitting here, you know, again, with this tax credit and and some of the tax some of the some of the continuing education classes that I was instructing for other accountants, we kinda made the joke that this this credit's a little bit of of all hat and O'Connell. That being said, shout out to our friends at the Wildlife Partners, by the way. Not that they have cattle, though, but they have some wicked hats. Yes.
Speaker 2:And they're just really great people. I love those. Well, man,
Speaker 4:they are. But but the thing is this credit's gonna be around for the next ten years. So although we might not see a lot of of twenty twenty three credit claims, we think that this is a long play looking at the the quality and longevity of these vehicles. So may so a vehicle that's four, five years old that you're purchasing in 2029 is probably gonna come in with less deferred maintenance than a three, four, five year old EV right now, but do with technology. So the the positive here is this is a credit that's gonna be around, you know, for the next ten years.
Speaker 4:It goes all the way to 12/31/2032. Now let's talk briefly about who qualifies, okay? Because you've got the type of vehicle, type of transaction, the last hurdle is gonna be, who's gonna qualify for this? And you must be the following, John. You must be an individual who bought the vehicle for use and not resale.
Speaker 4:So this isn't someone that buys and flips vehicles. This is what does it say is if you're in the business of reselling vehicles, this is not a credit for you. You can't be the original owner, hence the used vehicle. You can't be claimed as a dependent on another person's return, and this gets tricky. Because a lot of times when we start looking at the there's the other qualifications when we talk when we look at income, you know, imagine you're a parent, your child's, you know, going off to college, 18, 19 years old, you'd like to buy a a modest vehicle, you'd like it to be electric, and you're thinking, well, why don't we just have the child buy the vehicle since they're gonna be under the income threshold that I'm gonna talk about in a moment.
Speaker 4:And that makes sense. Right? That's good tax planning. Hey. Have the child buy it, not the parent.
Speaker 4:Put it in the child's name. But guess what? You can't be dependent on another person's return. So now that you're disqualified. And you can't you can't have claimed this credit, at any time in the last three years.
Speaker 4:Hopefully, when you buy a used EV, it's gonna last you more than three years anyway. That's the hope.
Speaker 2:Right. That's the goal. That is the goal.
Speaker 4:Now I'm gonna I'm gonna wrap up by talking about the modified adjusted gross income restrictions. Meaning, this is the real tough part, if you haven't thought this stuff already. If you're over a certain income threshold, you're ineligible for this credit. And this is what's called a cliff. Meaning, some tax credits, like child tax credit, they phase out with certain income, your income credit.
Speaker 4:This is a cliff. If you go over the cliff, boom. You're you get nothing. So your modified adjusted gross income, which is typically your AGI or adjusted gross income for married filing joint or surviving spouses can't exceed a hundred and $50,000 to be eligible. For head of household, it can't go over a hundred and 12,500.
Speaker 4:And for all other filers, which should be married filing joint or separately, single, seventy five thousand dollars. So those are pretty low minimums or maximums. The the good thing is you could use your modified AGI from the year you take delivery of the vehicle or the year before, whichever is less. So that's a positive because let's face it, John, not too many people that make under $75,000 are running around buying a $20,000 used EV. Right.
Speaker 4:It just doesn't make you know, and and if they are at that point and they have dependents, they might not even have much tax to pay. And then that's where, you know, this is this is a I think this is could be a very valuable credit. I think it could be it's gonna be used down the road as the years go on. I hope it gets expanded upon for the consumer. But this credit, as we dove into it, and many of our tax professionals agree, again, to use that all hat and no cattle, it might be some type of propaganda by the by the government to say, look.
Speaker 4:We, you know, we care about, you know, sustainability. We care about being green, so we pass this credit that basically not many people are gonna be register eligible for. And even if they are eligible, it's a nonrefundable credit, and the people that are eligible probably don't pay their much in tax anyway. Not to poo poo the credit, but, you know, I just don't want people in the teaching tax flow community, and again, we've had a lot of people reach out about this through our different channels, going in assuming I'm I'm just gonna get a $4,000 credit because that's what I heard.
Speaker 2:Right. And that's actually Chris, when you mentioned that, it's, you know, some time ago. I mean, this could even be five years ago or so. I remember I think the Volt the Chevy Volt was a big one. And, again, don't fact check me on this one, but I feel like it came out that some dealers were using that as part of their advertising and their marketing that there's credits and they miss, misworded it, we should say.
Speaker 2:And, kind of it was implied that it's also on lease vehicles, which we won't get into, but that's not the case because it's never a lease vehicle is never truly deeded if we will, registered to you as an individual. So, obviously, it's a whole another thing. So that was interesting, I remember. But as far as for everything we have here, I mean, there there are some limitations that we ran through. The good thing is is that they're pretty cut and dry what they are.
Speaker 2:It's just obviously who qualifies for them. You gotta check check the right boxes and all the boxes and not some of the other ones. So I promise, Chris, this is my last joke about us. You know? I'm glad we took a look under the hood or I should say the frunk instead of hood because true EVs have front trunks since yeah.
Speaker 2:Anyways. Well well, any closing notes on this? Yeah.
Speaker 4:The final thing I wanna mention, and we'll put this in the show notes as well, to claim this credit, you're just going to file a form eighty nine thirty six or your tax professional is gonna help you out with it. And in my last piece of advice is before you purchase a vehicle, just make sure you're it's and if you think it's gonna be eligible, make sure it is, and and feel free to reach out to the here us here at Teaching Tax Flow or or in our channels, and and we're happy to help.
Speaker 2:Absolutely. Absolutely. Well, thanks, Chris, for diving into this with us, everybody for listening on this. Again, great topic that we dove into. Something a little bit different than normal.
Speaker 2:I mean, I'm sure a lot of people expected us to talk about, you know, business deductions with vehicles. This one's great because we get into the personal side of it, but then also we will drop those links in there. You can click on them. Please follow along. Any questions, reach out with those.
Speaker 2:But until that, you reach out if you have questions. We're here if you need us. We will see you same place, same time here on the teaching tax flow podcast next week. Thank you to everybody for hanging out with us here on this episode of the Teaching Tax Globe podcast. I'm sure you have questions about this as we all did the first time we seen it.
Speaker 2:Again, this is just an update from our team to our community members. Lots of information to come with this or I should say results or outcomes, we should say, of the IRS offering this here in years to come as well, but as promised, we did drop some links in the show notes for references, for some forms, a lot of stuff that Chris and I discussed. We actually put in those notes you can take a peek at at your leisure if you have any questions. And until then, always feel free to drop us a line, email, Facebook message, wherever you choose, But don't forget to join that Defeating Taxes private Facebook group page. It's free, no cost, no obligations.
Speaker 2:Just join it. It's where our community is most active. We look forward to seeing you there on that group and back here again next week as always on the Teaching Tax Flow podcast.
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