Tax Credits: why I bought a Tesla
Tax credits are great nudges but shouldn’t be driving business or personal purchases.
As some of my clients know, I bought a Tesla in 2023 and will be happily claimed the EV credit for the full $7500. Qualifying for the credit was a factor in the decision but was not the catalyst.
Too often I’ve sat across from clients who have installed an expensive solar system or a geothermic heat pump or other costs that they took on because the promoter promised them a tax credit. People love to hear about tax savings and will pursue tax savings to their detriment. There is an emotional response to saving tax dollars and sticking it to the IRS. The tragedy is when they make a decision, qualify for the tax credit, but don’t owe taxes that year and lose out of any benefit of the credit. Some credits carry forward, but not all.
Promoters always qualify the tax implications with a quick “consult your tax professional to see if you qualify” or other such language. That is helpful advice, and I am always happy to discuss a situation with one of my clients to estimate the impact of the credit.
The worst offender of the decisions based on tax credit has to be the Advanced Premium Tax Credit (APTC). The process is you go to healthcare.gov, estimate your income for the following year, and then select the level of coverage you want. The tax credit is applied toward the cost of the premium each month you are enrolled and in a perfect world your income estimation is right on, the advanced credit amount is correct, and there is no reconciliation on the tax return. The issue comes when a person’s income is more than they estimated. The credit is not qualified for, and now it needs to be repaid. This credit can be thousands of dollars and repaying it can be a real burden. Often a person wouldn’t have purchased the costly plan if not for the subsidy of the credit. When they don’t qualify for the credit then there is no subsidy, and they are left holding the bag for a policy they would not have chosen otherwise.
The other issue with credits is sufficient tax liability. Most tax credits are non-refundable. A credit like the earned income credit which is refundable acts like a payment into the system rather than an offset of tax owed. That means if you qualify for a $5000 EIC and only owe $2000 in taxes, you’ll be treated as if you made a $5000 payment and then you’ll get a refund for the $3000 “overpayment”. A non-refundable credit of $5000 in the same scenario would offset the $2000 of taxes due and then either be lost or carried forward to future year(s). Knowing if the credit you’re interested in is able to be carried forward and for how many years is an important piece of information if your liability isn’t enough fully utilizing the credit. The solar credit can be carried forward 20 or 22 years depending on what year the credit originated from, the EV credit cannot be carried forward and is lost if not used. The adoption credit can be carried forward for six years.
The 2023 EV credit eliminates some of this uncertainty by using the prior year’s income or current year’s income to establish income level qualifications. I hope that in future they allow past year’s income to be used to qualify.
I didn’t buy a Tesla to qualify for the credit. We needed to replace my wife’s car and I wanted to dip my toe into the EV world with a hybrid. After considering the cost and the complexity of a vehicle with an EV and an ICE powertrain we decided to go all in with a full EV. The Nissan Ariya and Ioniq 5 were top contenders, but when comparing them with the Tesla – the only one of the three that qualified for the EV credit – the Tesla we were interested in was the least expensive (much less expensive when also factoring in the credit) and most preferred. We preferred the tech in the Tesla, and the charging system can’t be compared to. I would have gotten an EV with or without the credit. We probably would have chosen the Tesla regardless of the credit.
If you’re on the fence about a new project or cost and just need a little nudge to pull the trigger on an idea, or if you’re already doing something that qualifies you for a credit, do the thing and claim the credit.
If it’s not a good idea for you to meet the requirements of a credit, don’t do it. Don’t chase research expenses solely to qualify for the R&D Credit, don’t adopt kids you don’t have room in your life for to qualify for the child tax credit and adoption credit, don’t install an expensive solar project if the only reason is to get the 30% credit, don’t buy a new car if you are just chasing the $7500 credit (especially now that that credit has expired).
If you need the nudge of the credit to push you to one side of a decision, please contact me so that we can get some comfort on if you’ll qualify and be able to utilize the credit.
Let me know if you’ve done anything unusual in the last year that might qualify you for a credit.
