Leasing vs. Buying an Electric Vehicle

An electric car charges at a mall parking lot in Corte Madera, Calif., on June 27, 2022. (Photo by Justin Sullivan/Getty Images)

Owning a car is a no-brainer for most people. You shop around, look for financing, and then purchase it. It’s yours, and, as opposed to leasing, eventually, you won’t have a car payment. But if you’re interested in an electric vehicle (EV), buying may not be the best option.

The 2022 Inflation Reduction Act may have changed how EVs are purchased or leased. But how did this act affect buying an EV, and did it make leasing a better option?

Inflation Reduction Act

Besides expanding the Internal Revenue Service (IRS), the Inflation Reduction Act addressed clean vehicles and home energy.

Buying a qualified plug-in electric vehicle or a fuel cell vehicle (FCV) could, as of Jan. 1, 2023, or later, make you eligible for a tax credit. It also allowed tax credits to be applied to leasing EVs.

Purchased Vehicle Tax Credit

Starting in 2023, you may have qualified for a tax credit of up to $7,500 when purchasing a new EV or FCV, according to the Internal Revenue Code Section 30D. This is a nonrefundable tax credit. That means it will lower your tax liability, but you won’t see any overage back in the form of a tax refund. And you can only claim one credit per vehicle.

The overall cost of the vehicle is restricted. There’s a price cap. The manufacturer’s suggested retail price for SUVs or trucks must be $80,000 or lower to qualify. A sedan is capped at $55,000. Besides price caps on new EVs and FCVs, there are set limits on a person’s modified adjusted gross income.

Used EV Tax Credit

If purchasing a used EV or FCV, you could qualify for up to $4,000 in tax breaks. The used car credit is limited to 30 percent of the car’s purchase price.

This is also a nonrefundable tax credit and has income restrictions.

The income restrictions are lower for the used tax credit than for the new tax credit. For example, a single filer’s modified adjusted gross income for purchasing a new EV is $150,000 or lower. But a single filer’s modified adjusted gross income for buying a used EV is $75,000 or lower.

North American Assembly Required for New EVs

But with those tax credits comes another restriction when purchasing new EVs.

One main stipulation to qualify for a tax credit when purchasing a new EV is vehicle sourcing. The new EV must have undergone final assembly in North America to be eligible, and at least 50 percent of its battery components must be made in North America.

This eliminates specific models that are eligible. As of April 2023, for example, some models, like the Tesla Model 3, are eligible for full credit, $7,500, while other vehicles, such as the Ford Mustang Mach-E, are eligible for only a partial credit of $3,750.

Nine vehicles, such as the Nissan Leaf, will not be eligible for any tax credit.

If you are questioning the build of a vehicle, confirm it with the vehicle identification number (VIN). You’ll find this on the vehicle. It can then be run through the U.S. Department of Transportation VIN decoder to identify the vehicle’s assembly location.

Leasing EV an Option

Leasing an EV may be a more viable option. It also may be a more affordable option, and you'll have more choices.

Leased vehicles don’t come under the same North American sourcing rules as new EVs. Congress classified leased EVs as “commercial vehicles.” And under the law, these commercial EVs are exempt from the North American battery contents and manufacturing requirements.

This gives you more choices. For example, the low-cost Nissan Leaf, which doesn’t meet the new EV requirements, meets the leasing requirements.

This has spurred the number of people who are choosing to lease. In April 2023, almost 37 percent of EVs were leased.

Leasing also opens up the EV tax credit to those who don’t meet the modified adjusted gross income requirement.

Requirements for Leasing EV

There’s a catch to receiving the tax credit. It doesn’t go directly to you when you lease. The car dealer owns the tax credit, not you as the lessee. The dealer must agree to pass the $7,500 savings onto you.

The savings you receive from the tax credit will be in the form of a rebate or a possible reduced lease price.

But the upside is that there won’t be any income restrictions on receiving the savings. Since, technically, the tax credit belongs to the dealer, your modified adjusted gross income doesn’t matter.

Leasing Has Advantages

The advantage of leasing the sometimes-pricey EVs is typically lower monthly payments. You’ll also have a lower down-payment.

There will be a warranty on the vehicle while it’s in your possession, and you'll have access to newer EVs regularly.

Not having income restrictions or needing to file for the tax credit is also an advantage.

Leasing Expensive EVs

If you’re in the market for an EV, leasing may be the way to go. You won’t have to worry about filing for tax credits or income restrictions. You also won’t have to worry about a battery wearing out while paying off your vehicle. The car is just returned for a new one once the lease expires.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.