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Is a Bonanza of Electric Vehicle Gifts on the Horizon?

Posted on Jan. 9, 2023
James Alm
James Alm
Jay A. Soled
Jay A. Soled

Jay A. Soled is a professor at Rutgers Business School and directs its Master of Accountancy in Taxation program. James Alm is a professor emeritus at Tulane University.

In this article, Soled and Alm argue that some provisions of the Inflation Reduction Act could encourage taxpayers to make automobile-related gifts, not out of generosity but as part of a strategy designed to achieve significant income tax savings.

Copyright 2023 Jay A. Soled and James Alm.
All rights reserved.


Predicting the future is never easy. This is particularly true for the behavioral effects of tax legislation. Some behavioral effects can readily be anticipated (raising cigarette taxes has caused taxpayers to smoke less1); other effects may prove unanticipated (allowing accelerated depreciation for vehicles weighing over 6,000 pounds has spurred sport utility vehicle purchases2).

The Inflation Reduction Act (IRA, P.L. 117-169) section on clean vehicle purchases is yet another example of how the behavioral effects of tax legislation are difficult to predict. Congress anticipates that its newly formulated tax credits for clean vehicle purchases will hasten the general populace’s transition away from internal combustion engine use3 and generate the production of battery minerals in the United States and those countries with which it has free trade agreements.4 Indeed, these effects seem likely to occur. However, Congress also expects that the tax credit will benefit taxpayers of moderate economic means. In this regard, it may have made a miscalculation. Instead, this legislation may result in a bonanza of automobile-related gifts by taxpayers whose incomes meet the legal requirements for the generous clean vehicle credit to related taxpayers (for example, parents, grandparents, and siblings) whose large incomes would otherwise disqualify them from taking the credit.

This article explores the implications of this possible automobile-related gift bonanza. It provides an overview of the portion of the IRA concerning electric vehicle purchases — the basics of the law as well as its intent. Then it examines the IRA’s likely behavioral effect on individual taxpayers and its income and transfer tax consequences. Finally, it makes a remedial legislative suggestion designed to help Congress — insofar as automobile purchases are concerned — fulfill its legislative objectives.

Overview of the Revamped EV Tax Credit

Before passage of the IRA, the tax credit for electric car purchases — introduced by the Energy Improvement and Extension Act of 2008 — enjoyed relatively broad success in encouraging taxpayers to make electric car purchases.5

Initially, the code permitted a tax credit for any EV that met a series of listed conditions.6 These conditions were largely automobile-manufacturer-centric. Each manufacturer had to petition the IRS to receive certification that purchasers of its product would qualify for the tax credit based on battery capacity.7 Further, once the number of qualifying vehicles that a manufacturer sold equaled or exceeded 200,000 units, the availability of the credit would be gradually phased out.8 Computation of this earlier electric car credit was based solely on battery capacity. The initial credit was $2,500.9 An additional $417 tax credit was made available for each kilowatt-hour of capacity exceeding 5 kilowatt-hours, up to a total of $5,000,10 capping the total EV tax credit at $7,500.11

The IRA jettisons these requirements and increases the burden on manufacturers that want their patrons to qualify for the clean vehicle credit under section 30D. The critical requirements for this tax credit qualification that manufacturers must now meet are threefold.

The first requirement concerns the battery. It must (1) have a capacity of not less than 7 kilowatt-hours,12 (2) be capable of being recharged from an external source of electricity,13 and (3) be manufactured or assembled in North America.14

The second requirement pertains to minerals. A specific percentage of the minerals contained in the battery (gradually increasing over time) must have been extracted or processed in the United States or any country with which the United States has a free trade agreement.15

The third and final requirement concerns final vehicle assembly: It must occur within North America.16

Importantly, for credit qualification, the IRA also imposes requirements beyond those it places on automobile manufacturers. The IRA now limits the credit’s availability based on automobile price and taxpayer income. More specifically, the legislation precludes tax credit availability if a manufacturer’s suggested retail price exceeds a specific dollar threshold: $80,000 for vans, $80,000 for SUVs, $80,000 for pickup trucks, and $55,000 for all other vehicles.17 Also, if the taxpayer’s modified adjusted gross income in the year of purchase or the preceding taxable year exceeds a set threshold — $300,000 for a joint return or a surviving spouse, $225,000 for a head of household, and $150,000 for all other taxpayers18 — then the taxpayer is not eligible for the tax credit.19

The purpose of these income limitations is self-evident. They are meant to encourage taxpayers of modest economic means who are not in the market for ultraluxury vehicles to purchase EVs, as opposed to providing incentives to the wealthy for these purchases. However, the law may not prevent a gift-giving tax strategy that allows high-income taxpayers to circumvent these income limitations.

Gift-Giving Bonanza

Taxpayers typically try to take advantage of tax breaks. Thus, when it comes to the robust federal tax credit for EV purchases, there is every reason to assume that they will attempt to capitalize on it — even in ways that were not intended. In particular, they may engage in a gift-giving ploy so that the EV tax credit will inure to the benefit of high-income taxpayers — a consequence not planned or desired by Congress.

Before delving into the details of the possible ploy that taxpayers may undertake, some context is important. It involves the nation’s transfer tax system and, more specifically, the gift tax found in chapter 12 of the code.

Under the law today, taxpayers who make gifts are theoretically supposed to pay the gift tax.20 The adverb “theoretically” is used here because most taxpayers never actually incur any gift tax.21 The reasons for that are twofold. First, the code provides a generous annual exclusion for so-called present-interest gifts that do not exceed, per person, $17,000 annually (or $34,000 for married taxpayers who wish to split their gifts).22 Second, during the lifetime of every taxpayer, the code also shelters those whose cumulative lifetime gifts do not exceed the basic exclusion amount ($12.92 million).23

Beyond the generous allowances that the code sets forth, there is another factor to consider. Taxpayer compliance in the realm of the gift tax is lackluster at best and abysmal at worst.24 Why? If taxpayers make gifts that utilize all or a portion of their basic exclusion amount, there is no penalty in place if they are derelict in fulfilling their tax-return filing obligations.25 Also, when it comes to gift giving, there is no third-party tax information reporting. In the absence of that reporting, taxpayer compliance ordinarily plummets.26 Finally, many taxpayers likely believe that they should be thanked rather than taxed for their generosity.

The bottom line is that the nation’s gift tax will probably not prove to be a meaningful deterrent to any EV gifts. In the absence of any transfer tax impediment, the following scenario (or similar ones) is likely to unfold.

Consider the plight of a taxpayer and his spouse, Mr. and Mrs. Rich, who together earn $350,000 annually. They want to purchase a 2024 Cadillac Lyriq SUV with a manufacturer’s list price of $77,500. However, because of the income threshold limitations,27 the Riches recognize that they will not qualify for the clean vehicle credit. Instead, they recruit their daughter Penny, who earns $100,000 annually, to purchase the vehicle, knowing that, given her annual income, she would qualify for the credit. Once the vehicle is purchased, and sometime soon thereafter, Penny will gift the vehicle title to her parents. Later the Riches will gift the sum of $70,000 (that is, $77,500, less the $7,500 clean vehicle credit that Penny would receive) to Penny.28

Theoretically, the IRS could challenge the legitimacy of the $70,000 gift as a disguised purchase by the taxpayer masquerading as a bona fide gift.29 However, because the overall dollar stakes are rather small (that is, a possible disallowance of the clean vehicle credit), as a practical matter the IRS is not likely to pursue any remedial action.30 Further, the Riches and their daughter could use the element of time to obscure the nature of their transactions. That is, they could transfer the monetary sum in one year and title to the vehicle in another year.

This scenario is not far-fetched. On the contrary, on a family-by-family basis, with thousands of dollars of possible tax savings at stake, the odds seem likely for widespread replication of this practice as taxpayers learn from the media and the internet of its potential viability.

Commentators might argue to the contrary — that this type of back-to-back gifting scheme will not become commonplace. However, countervailing factors may well make automobile gifting an attractive tax-saving device. Consider the following possible objections and the reasons why they are not credible:

  • First, some commentators might argue that the steps involved with the scheme are too complicated for most taxpayers to understand, especially relative to simply overstating deductions or underreporting income. However, the two enumerated steps that are involved (that is, an automobile purchase followed by two interrelated gifts) are equal to or less than many other widely used tax-avoidance strategies that involve similar payoffs.31

  • Second, other commentators might contend that the payoff is too small to warrant its undertaking. However, there is evidence from IRS audits that it is common for individuals to engage in tax avoidance or tax evasion strategies that generate tax savings comparable to the back-to-back gifting scheme. Recent IRS statistics for fiscal 2021 indicate that the average amount of taxes recovered from all IRS audits (field audits plus correspondence audits) across all income classes is $12,256,32 an amount only somewhat greater than the $7,500 tax credit available to purchasers of EVs. Further, the overwhelming percentage of IRS audits (85 percent) are from correspondence audits. For this category of IRS audit, the average amount of taxes recovered across all income classes is $8,187 — an amount even closer to the $7,500 tax credit.33 Further, the average amount of taxes recovered from IRS correspondence audits is always less than $7,500 for all income classes less than $500,000. Even for taxpayers earning incomes in the $500,000 to $1 million range, the average amount of taxes recovered in an audit is only $10,110. And it is only for taxpayers with incomes greater than $1 million that the taxes recovered from correspondence audits are well above the $7,500 EV tax credit.34

  • Third, some other commentators might argue that taxpayers will not, for whatever reason, bother with cheating to gain tax advantages when buying EVs. However, there is clear evidence that this argument is simply untrue. In 2011 the Treasury Inspector General for Tax Administration found that individuals fraudulently claimed millions of dollars of EV tax credits.35 A follow-up TIGTA report in 2019 found that these practices have continued largely unchanged.36 There is, therefore, recent history demonstrating that taxpayers are ready to use questionable practices to gain EV tax credit advantages.

Overall then, many taxpayers may well choose this gift-giving strategy as a means to reduce their income tax burdens. After all, given recent automobile price escalations,37 the clean vehicle credit is one possible refuge that taxpayers still have to shield themselves from paying exorbitant amounts. Consider also that after the imposition of federal income tax, state income tax, and payroll taxes, the take-home pay of the Riches, who earn $350,000, is likely to be in the $200,000 range. The sum of $7,500 is thus the equivalent of two weeks’ worth of combined after-tax wages, making it economically attractive to undertake this strategy.

Even so, two points of clarification need to be made.

First, the practice of EV gift-gifting will likely not be omnipresent. There are several reasons not to anticipate wholesale abuse:

  • many taxpayers abhor the administrative paperwork and overall hassle associated with the Division of Motor Vehicles and title transfers;

  • wealthy taxpayers often relish their purchases of expensive automobiles and SUVs, and so the caps on manufacturers’ listed prices may dissuade this socioeconomic segment of the population from purchasing vehicles not deemed worthy of their financial status; and

  • the code does not make any inflation adjustments on the caps on either the manufacturers’ listed prices or the amount of the credit itself, so, over time, the allure — and the payoff — of this tax-saving device will diminish.

Still, the enticement of tax credit money is attractive, so the practice of EV gift-giving is likely to be quite vibrant.

Second, Treasury probably cannot stem this practice by promulgating regulations that warn taxpayers against making back-to-back gifts such as the one highlighted here. As a practical matter, a Treasury regulation is not likely to be incorporated into tax software packages as part of general queries that are raised with taxpayers. Because most taxpayers use tax preparation software to do their returns,38 the absence of a question concerning EV gift-giving would negate a regulation’s effectiveness to stem this taxpayer practice. Also, even if the putative tax preparation software were to solicit a user response regarding this issue, taxpayers could readily employ a form of convenient amnesia and selectively forget about the transgressive nature of their actions.

Remedial Policy Recommendation

Given that a sizable segment of taxpayers may employ the gift-giving strategy outlined here, and because there are no readily available administrative fixes for this problem, a simple legislative remedy should be used to close this loophole. To keep taxpayers from gaming the clean vehicle credit, Congress should add a disallowance provision to the end of section 30D, along the following lines:

(h) Any taxpayer who gratuitously transfers (via a gift, not a bequest) a new qualified plug-in electric drive motor vehicle in the first or second calendar year of purchase forfeits the credit.

Adding a provision such as this to the code would put an immediate end to a practice that is illegitimate and undermines one of the central goals of this credit: to make EV ownership commonplace among the middle class and thereby affect climate change. The sooner Congress takes this action, the sooner this policy objective will be fulfilled.


In light of taxpayers’ tendencies to make the most of available tax-saving opportunities, automobile gift-giving may soon become a trend. This phenomenon would subvert the IRA’s legislative intent of having the clean vehicle credit accrue to taxpayers of moderate economic means, and it would cost the treasury lost revenue and undermine taxpayer confidence in the tax system.

Congress should therefore be proactive and reform the code as suggested. If it does, taxpayers will be foiled in their efforts to circumvent the statutory income limitations, and the car-gifting prediction suggested in this article will be stymied. Indeed, by making the proposed statutory refinement, the integrity of the nation’s tax system will be enhanced, and the legislative goal embodied in the IRA of reducing the nation’s carbon emissions will be more readily attainable.


1 See Pearl Bader, David Boisclair, and Roberta Ferrence, “Effects of Tobacco Taxation and Pricing on Smoking Behavior in High Risk Populations: A Knowledge Synthesis,” 8(11) Int’l J. Env’t Rsch. & Pub. Health 4118 (2022) (“Tobacco taxation, passed on to consumers in the form of higher cigarette prices, has been recognized as one of the most effective population-based strategies for decreasing smoking and its adverse health consequences.”).

2 See Danny Hakim, “In Tax Twist, Big Vehicles Get the Bigger Deductions,” The New York Times, Dec. 20, 2002 (explaining how the deduction for SUVs that exceed 6,000 pounds encourages taxpayers to make those purchases).

3 See Justin Westbrook, “Electric Vehicles Are Way, Way More Energy-Efficient Than Internal Combustion Vehicles,” MotorTrend, Aug. 12, 2022 (“Out of the 8.9 million barrels of gasoline consumed daily in the U.S. on average, only 1.8 million gallons, or approximately 20 percent, actually propel an internal combustion vehicle forward. The other 80 percent is wasted on heat and parasitic auxiliary components that draw away energy. As the world begins its shift to EV proliferation, the good news is electric vehicles are far more energy efficient on the road.”).

4 See Reed Blakemore and Paddy Ryan, “The Inflation Reduction Act Places a Big Bet on Alternative Mineral Supply Chains,” EnergySource, Aug. 8, 2022 (“This sets a highly ambitious target for alternative mineral supplies within a provision designed to incentivize domestic EV deployment.”).

5 See Sally Parker, “Want Consumers to Buy Electric Cars? Give Them Tax Credits,” Chicago Booth Review, Jan. 10, 2022 (“Research by University of Wisconsin’s Cheng He, University of South Carolina’s Ö. Cem Öztürk, Georgia Institute of Technology’s Chris Gu, and Chicago Booth’s Pradeep K. Chintagunta provides . . . support . . . for using tax credits to encourage electric-vehicle purchases. They find that tax credits are effective, relatively low cost compared with alternatives, and benefit many middle-class families.”).

6 These conditions were delineated in paragraphs (d) and (f) of the earlier version of section 30D.

7 Notice 2009-89, 2009-48 IRB 760, sections 5.01, 5.03(5), modified by Notice 2016-51, 2016-37 IRB 344.

8 Section 30D(e)(2) (credit availability phaseout once a manufacturer had sold at least 200,000 units in the United States).

9 Section 30D(b)(2).

10 Section 30D(b)(3).

11 Section 30D(b)(2), (b)(3).

12 Section 30D(d)(1)(F)(i).

13 Section 30D(d)(1)(F)(ii).

14 Section 30D(e)(2)(A). Although this calculation is highly technical in nature, the essence is that the value of the components contained in the batteries that were manufactured or assembled in the United States must equal or be greater than a set percentage that starts at 50 percent (before 2024) and gradually increases to 100 percent (after 2028). Id. Section 30D(e)(2)(B).

15 Section 30D(e)(1).

16 Section 30D(d)(1)(G).

17 Section 30D(f)(11).

18 Section 30D(f)(10)(B).

19 Section 30D(f)(10)(A).

20 Section 2501(a).

21 In 2020 (the most recent year figures are available), the number of gift tax returns that resulted in actual gift tax payments was 516 for the entire United States. This numerical figure is not a misprint. See IRS Statistics of Income Division, “SOI Tax Stats — Total Gifts of Donor, Total Gifts, Deductions, Credits, and Net Gift Tax,” published annually.

22 Section 2503(b); Rev. Proc. 2021-45, 2021-48 IRB 764, section 3.43. This is the annual exclusion for 2023, but this dollar figure is annually adjusted for inflation.

23 Section 2505(a); Rev. Proc. 2021-45, section 3.41. This is the basic exclusion amount for 2023, but this dollar figure is annually adjusted for inflation.

24 See Mitchell M. Gans and Jay A. Soled, “Reforming the Gift Tax and Making It Enforceable,” 87 Boston L. Rev. 759 (2007) (explaining why gift tax compliance is lax).

25 Id. at 777 (“But application of each of the foregoing penalties is predicated upon there being an actual gift tax due. In the absence of a gift tax being due, there can consequently be no accuracy-related penalty, failure-to-file penalty, or failure-to-pay penalty. Thus, in a world where most taxpayers do not ordinarily make gifts that exceed their annual gift tax exclusion (currently, $12,000) or their lifetime gift tax exemption of $1 million, there is virtually no chance that any of the foregoing penalties will apply.”).

26 See Congressional Budget Office, “Trends in the Internal Revenue Service’s Funding and Enforcement,” at Figure 4 (July 2020); see also Leandra Lederman and Joseph C. Dugan, “Information Matters in Tax Enforcement,” 2020 B.Y.U. L. Rev. 145, 145-146 (explaining that “government needs information about taxpayers’ transactions in order to determine whether their reporting is honest” and that third-party reporting helps the government obtain that information); Joel Slemrod, “Cheating Ourselves: The Economics of Tax Evasion,” 21 J. Econ. Persp. 25, 37 (2007) (correlating “the rate of compliance and the presence of enforcement mechanisms such as information reports and employer withholding”).

27 See supra note 18 and accompanying text.

28 The sequence of these events can easily be reversed — that is, the Riches could have readily made a large monetary gift to their daughter, and, after she purchased the car, she could have reciprocated and gifted title to the car to her parents.

29 Admittedly, there are several court cases that have deemed reciprocal gifts illegitimate taxpayer ploys to circumvent taxpayers’ gift tax obligations. Furst v. Commissioner, T.C. Memo. 1962-221; Schultz v. United States, 493 F.2d 1225 (4th Cir. 1974); Sather v. Commissioner, T.C. Memo. 1999-309, aff’d in part and rev’d in part, 251 F.3d 1168 (8th Cir. 2001); Estate of Shuler v. Commissioner, T.C. Memo. 2000-392, aff’d, 282 F.3d 575 (8th Cir. 2002).

30 Consider, too, that if the IRS conducted an audit, it would, by necessity, be labor-intensive and awkward, engendering interviews with various family members and the receipt of a lot of paperwork.

31 For example, regarding typical sale-and-leaseback arrangements with family members, taxpayers must endure a plethora of complicated legal steps to secure possible tax savings that are often designed to yield thousands — but not millions — of dollars of tax savings. See James John Jurinski, “All in the Family,” 41 Real Est. Tax’n 41, 43 (2013) (“On the other hand, an excessive rent payment can be a tax-advantaged way to shift income among family members. If the inflated rent goes to a family member in a lower tax bracket, the family as a unit may be able to realize a lower over-all tax rate on the family’s earnings. This could take the form of a sale lease-back or gift lease-back.”).

32 See IRS, “2021 IRS Data Book,” Publication 55-B, at Table 18 (May 2022). Using Table 18, the average amount of taxes recovered from all IRS audits is calculated by dividing the total “Recommended Additional Tax” for all individual income tax returns in column (4), or $8,076,816,000, by the total “Examinations Closed in Fiscal Year 2021” in column (1), or 659,012.

33 Id. This figure is calculated from Table 18 by dividing the “Recommended Additional Tax” for correspondence audits in column (6), or $4,580,195,000, by the “Examinations Closed in Fiscal Year 2021” for correspondence audits in column (3), or 559,421.

34 Id. All figures are calculated from Table 18 by dividing the “Recommended Additional Tax” for correspondence audits in column (6) by the “Examinations Closed in Fiscal Year 2021” for correspondence audits in column (3) for each income class.

35 See TIGTA release on individuals receiving erroneous tax credits for plug-in and alternately fueled vehicles individuals (Feb. 3, 2011) (“Approximately $33 million in credits for plug-in electric and alternative-fueled vehicles credits were erroneously claimed by at least 12,920 taxpayers through July 24, 2010. . . . That means about 20 percent of the $163.9 million in credits claimed by taxpayers from January 1, 2020, to July 24, 2010, for plug-in electric and alternative vehicle credits were claimed in error.”).

36 See TIGTA Report 2019-30-072, “Millions of Dollars in Potentially Erroneous Qualified Plug-In Electric and Alternative Vehicle Credits Continue to Be Claimed Using Ineligible Vehicles” (Sept. 30, 2019) (“The IRS does not have effective processes to identify and prevent erroneous claims for the Plug-in Credit. . . . TIGTA identified: 16,510 tax returns for which taxpayers received approximately $73.8 million in Plug-In Credits; 1,509 tax returns for which taxpayers received more than $8 million in Plug-in Credits; and 68 tax returns for which taxpayers received approximately $1 million Plug-In Credits.”).

37 See Bailey Schultz, “Want a New Car? Ownership Costs Are Way Up, So Plan to Spend About $900 a Month on It,” USA Today, Aug. 18, 2022 (“The average price paid for a new vehicle was the highest on record in July at $48,182, up 12 percent from the prior-year period, according to Kelley Blue Book.”).

38 See IRS data book, supra note 32, at Table 4 (indicating that 90 percent of individual returns were filed electronically).


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