Does the $7,500 Tax Credit Work On a Lease?

The $7,500 tax credit for electric vehicles, known as “clean vehicles” within the Inflation Reduction Act of 2022, allows consumers to reduce their tax burden by up to $7,500 when the manufacturer, electric vehicle, and consumer meet specific requirements. 

Consumers should know that the tax credits are effective the year after they purchase a new EV. These tax credits do not reduce the vehicle sales price as advertised by the dealership or manufacturer. 

Federal tax benefits for EV leases

One of the most common questions that comes up with mention of the $7,500 tax credit is if it applies to an EV car leasing deal. The Inflation Reduction Act of 2022 effectively leaves the decision up to automotive manufacturers, granting them the freedom to choose to pass on the tax incentives. 

The specific language regarding EV leases categorizes electric vehicles as “commercial vehicles.” This designation names the financing sector or dealership that legally owns the car on paper as the original user. Only original users are eligible for the full $7,500 federal tax benefit.  

When you purchase a new electric vehicle, it must meet specific requirements to be eligible for the $7,500 tax credit. These requirements are waived for EVs classified as “commercial vehicles” under Section 45W of the Inflation Reduction Act of 2022. 

Manufacturer 

Electric vehicles that meet the following requirements are eligible for the $7,500 tax credit: 

• 50% or more of the electrical battery components must be made in North America
• 40% or more of the minerals used to make the battery must come from a domestic source, but can also come from a foreign source if that source has a trade agreement with the United States
• The EV must be assembled in North America 

When you purchase a new vehicle, the dealership typically gives you a form documenting the information you need to claim your $7,500 tax benefit. This information includes details such as the date of sale, VIN, verification of the taxpayer (you) as the original user, and verification of the maximum credit available to that vehicle. 

Personal 

You can claim the $7,500 tax credit if you: 

• Have a tax burden of more than $7,500 for that tax year
• Your adjusted gross income is less than:
  • $75,000 if you are an individual  
  • $112,500 if you are the head of household
  • $150,000 if you are married 

Leased vehicles may be eligible for a portion of or the entire electric vehicle tax credit, regardless of how long the lease on a car extends. Dealers typically incorporate the tax benefit as a capitalized cost reduction within the lease to lower your monthly payments. Many people choose to lease an electric vehicle and then purchase it to take advantage of these tax benefits if the dealer allows it. 

Lease hackers will be anxious to know which electric vehicles are eligible for the tax credit. The list includes:

• Cadillac LYRIQ
• Chevrolet Bolt
• Ford E-Transit  
• Ford Lightning
• Genesis GV70 
• Mustang Mach-E
• Nissan ARIYA 
• Nissan LEAF
• Rivian R1S
• Rivian R1T
• Tesla Model 3
• Tesla Model Y 
• Toyota bZ4X
• Volkswagen ID.4
• Volvo S60 Recharge

These are the current 2023 models eligible for the $7,500 tax credit. You can also check eligibility at FuelEconomy.gov. 

Some wonder, “Is now a good time to buy an electric vehicle?” The short answer is that it depends on what you’re looking for in a vehicle and how comfortable you feel with the thought of leasing an EV and maintaining one. Here are some of the advantages associated with leasing an EV:

• Fuel savings: Arguably, you still have to pay for fuel with an EV, but it’s electricity instead of gas. Most electric bills for EVs are a fraction of the cost of fossil fuels. 
• No emissions testing: Electric vehicles are exempt from having to pass emissions testing, saving you time and money.  
• Tax incentives can lower your monthly payments: Manufacturers can offer discounts on leases by passing on federal tax breaks to you. These show up as capitalized cost reductions on your lease paperwork. 
• Higher residual values: Most electric vehicles continue to be in high demand. As such, they’re worth more at the end of a lease, so they retain a higher residual value that can lower your monthly payments. 
• Flexibility: Committing to an EV can be a lifestyle decision for most people. If you want the opportunity to return to a gas-powered vehicle, a lease can give you an out. 

You can also compare purchasing and leasing the exact vehicle to see how you’ll spend your money. Sometimes this can help you decide between leasing and buying an EV.  

Tesla debuted as an electric-centric brand and continues to pave the way for future EVs with its affordable Model 3. In addition, the new Nissan ARIYA joins the LEAF model as a fully electric import. The Volkswagen ID.4 is the German company’s best foot forward in the electric car arena. 

Let’s look at how much it costs to lease each vehicle. Note that specific prices, rates, and incentives will vary based on your location and credit qualifications. 

When you subscribe to an electric vehicle, you don’t have to worry about navigating the complexities of federal tax incentives. Instead, you can focus on one monthly payment. And since the only other monthly fee you’ll pay is fuel, you can still save hundreds, if not thousands, of dollars each year. 

Tesla makes it easy to compare your monthly and final costs if you’re considering leasing and purchasing a Model 3. The table below breaks down the integral costs associated with both options. Note the federal tax incentives row.  

It’s important to note that when considering a Tesla in the lease vs. buy comparison, Tesla does not allow you to purchase your vehicle after the lease has ended. Your contract likely also stipulates that you cannot pursue a third-party buyout like selling your car to Carvana.    

The most common alternative to leasing is buying, covered above. However, there are other ways you can solve your transportation problem. 

Rideshare services

Taxi services such as Uber and Lyft make getting around town easy but only sometimes affordable. It makes sense to take an Uber when you’re on vacation and don’t want the hassle of a rental car. But when it comes to your daily travels, rideshare costs can add up quickly. 

Car-sharing programs

When you join a car-share program, it’s like having an extended family loaning you their vehicle. Cars within a car-share program float around the country and can be rented for a few hours to a few weeks at a time. However, if you don’t live in a bustling city, finding car-sharing programs near you can be challenging. 

Long-term rentals

Rental car companies often allow you to rent out their fleet for more than a week. These long-term rental cars are a good stop-gap measure if your car is in the shop or you’re between vehicles. However, you are subject to whatever vehicles the rental car company has on the lot, which may or may not be the models you want. 

Car subscriptions 

Paying for Uber rides and renting a car for weeks can get expensive. If you’re looking for an affordable alternative, a car subscription can help you drive the vehicle you want and still work within your budget. 

Car subscription services like FINN bundle registration, insurance, depreciation, and maintenance into one monthly payment. FINN delivers your chosen car right to your door. You can also choose from six and 12-month subscriptions to fit your lifestyle.