Considering an Electric Vehicle: Should You Buy or Lease?

Norway will go all electric by 2025 and 80% of their new cars sold are Electric Vehicles (EVs). Entire countries, including the Netherlands, France, Germany, the UK and India, have considered banning the sale of all internal combustion engines. All new Volvo models are either hybrids or powered solely by electricity. Volkswagen has announced a move to electric, spending $193 billion dollars on developing electric cars and batteries. While the international EV trend seems to be clear, in the U.S. manufacturers like Ford and GM have recently slowed production of EVs in response to a 506% increase in available inventory from the previous year.^[1]

Because there were some changes in the EV tax credit availability and eligibility starting in 2023 and because EVs are an available option for consumers looking to buy a vehicle, we thought now would be a good time to provide not only some pros and cons about EVs in general, but also pros and cons to consider when deciding whether to buy or lease an EV.

EV Pros and Cons

When weighing EVs as an option, it is important to know that there is much more to think about than fuel savings. While this list is by no means comprehensive, here are a few things worth thinking about as you begin your research.

Technology:

• PRO: EVs are quiet and efficient.
• CON: Charging station availability is improving but is still an issue in some areas.
• PRO: On the one hand, overall quality and range of EVs has improved and more models including SUV and trucks are available to purchase.
• CON: On the other hand, with the rate that quality is improving, it may not be smart to buy an EV today if advances in technology mean more cutting-edge models could be available tomorrow. This could affect your vehicle’s value over time.
• PRO: EVs in general require less maintenance than that of an internal combustible engine.
• CON: However, factors like extreme hot or cold temperatures, stop-and-go traffic, and charging habits can affect range and overall battery life. Most new EVs leave the lot with an 8-year or 100,000-mile battery warranty.^[2]

Cost:

• CON: EVs can be expensive. In the U.S., the average price of all EVs (sedans, vans, trucks, SUV) comes in at about $76,000.^[3]
• PRO: EV owners spend less than half as much money charging their vehicles as they would fueling a car; U.S. averages per mile is $0.03 for an EV, compared to $0.10 for a gas car.^[4]
• PRO: Some electric companies offer credits toward your bill for charging EVs in non-peak hours. Many states offer rebates on EV accessories like chargers.
• CON: There may be some variable hidden costs such as EV registration fees and potentially higher insurance premiums.
• PRO: Your time is valuable. Some states allow EVs to use HOV and other “exclusive” lanes which may reduce tolls, time stuck in traffic, etc.
• CON: Depending on the model EV, collision repair costs could be higher and take longer due to specialized parts and labor.^[5]

Purchasing Pros and Cons:

Tax Credits

The amount of tax credit available to you basically comes down to whether the EV assembly qualifies, the EV purchase price, and your income.

• PRO: Certain criteria must be met in the assembly of the EV, and these criteria will become stricter over time. As of April 2023, the purchase of a new EV that meets current critical mineral requirements is eligible for a $3,750 tax credit. A new EV that meets current battery component requirements is also eligible for a $3,750 tax credit. Together, that means a possible tax credit of $7,500.^[6]
• PRO: In a change from last year, there is no longer an incentive limit. Whereas before January 1, 2023, the tax credit was only available to the first 200,000 EVs sold; now all qualifying new EVs sold are eligible.^[7]
• PRO: Beginning January 1, 2024, when purchasing a new EV, eligible tax credits may be used as a point-of-sale rebate by transferring credits to the dealer which can effectively lower the purchasing cost.^[8]
• PRO: In addition to federal tax savings, 19 states offer incentives for purchasing a new EV, ranging from $1,000 incentive in Delaware and Alaska to a $7,500 credit in Maine, California, and Connecticut.^[9]
• PRO: Used EVs with a purchase price of $25,000 or less are eligible for tax credits; amount is based on 30% of the EV’s value or $4,000 (whichever is less). Also, used EVs do not have any mineral or battery assembly requirements to be eligible for the tax credit.
• CON: Depending on what EV you are considering, the purchase price may affect your tax credit eligibility. If you are considering a qualifying SUV, van or pickup truck, the purchase price must be below $80,000 MSRP and for other qualifying vehicles, under $55,000 MSRP. ^[10]
• CON: There are maximum eligible income restrictions (MAGI) which may limit your tax credit eligibility when purchasing a new or used EV.^[11]

New EV:

Filing Status                                                               MAGI </=

Joint tax returns or surviving spouse                  $300,000

Head of household                                                      $225,000

Individual or any other filing status                      $150,000

Used EV:

Filing Status                                                              MAGI </=

Joint tax returns or surviving spouse                  $150,000

Head of household                                                      $112,000

Individual or any other filing status                      $75,000

Leasing Pros and Cons:

Tax Credits

• CON: A major drawback to leasing a new EV is that you will not be eligible for the tax credits offered when buying a new or used EV. In fact, when leasing an EV, those savings will bypass you and go back to the company you are leasing through. They may or may not extend these savings to you in your lease terms.
• PRO: However, if your MAGI is too high, or the vehicle MSRP doesn’t meet the cost cap, or the EV does not meet the mineral and battery assembly requirements (see aforementioned information), you will not qualify to receive a tax credit on the purchase of a new electric vehicle anyway.

Technology:

• PRO: Leasing allows you the flexibility to have the latest and greatest models, which can help mitigate the risk of the risk of being left technologically behind.
• PRO: Advancements in battery technology take place so rapidly that the value of cars currently on the market could decline as new options with longer battery life and faster charging hit the road.

Historically, most financial planners recommend buying vehicles rather than leasing. However, with rapidly changing battery technology and uncertain residual value, leasing an EV may make sense. And if the leasing company passes along some of the value of their EV tax credit to you, it may make a lease even more compelling.

Electric vehicles present a rapidly changing situation from a technology, tax and financial perspective. We strongly recommend you do thorough research (weighing all the pros and cons, not just those mentioned here) and discuss all of this with your tax preparer and Modera advisor before making a final decision.