With the passage of the Inflation Reduction Act through Congress comes major changes to the federal electric car tax credit, changes that may make it easier to own an electric vehicle but harder to afford one at first. The details are more complicated than ever, but can make a big difference in EV adoption. Here’s what you need to know as President Joe Biden prepares to enact the new law.
First the good news for EV buyers.
Credit extended to 2032
The new rules reauthorize the $7,500 tax credit for a full battery or advanced plug-in hybrid through 2032. This landmark decision protects a program that has been in place since 2010 and is set to be scrapped by some politicians and at least one faction of the petroleum industry as a cozy giveaway for electric car makers and wealthier car buyers.
No more popularity penalty
The new rules remove a cap that suspends the tax credit for any car brand once it has sold 200,000 units of qualifying electrified passenger vehicles. This “popularity penalty” has been denounced by automakers like Tesla and GM, who long ago sold more than 200,000 units and are now effectively playing at a $7,500 handicap. Ford and Toyota are also in the middle of phasing out the tax credit. While there are economic and industrial arguments on both sides, removing the 200,000-unit cap is clearly a benefit for car buyers who only want the cheapest cars to choose from.
If you choose a qualifying electric vehicle, you can immediately apply the tax credit to a car dealer by allocating your credit to them at the time of signing, much like buyers often do with manufacturer discounts. This saves you from waiting until tax day to receive the benefit. You still need to qualify for the credit at tax time, and the IRS could reclaim some or all of the amount if you don’t, but a little math on the back of the envelope should make it clear at the time of purchase.
So much for the clear good guys, now the new rules are getting tricky.
purchase price limits
Forget getting paid to buy a Porsche Taycan or Tesla Model S: the new rules only apply to cars costing $55,000 feweror SUVs and light trucks that cost $80,000 or more fewer. Automakers should lose little sleep over this, as buyers are far less cost-sensitive above these price points. But it’s worth noting that the average purchase price for a new vehicle in the US rose dramatically in May to nearly $48,000. I remember when rap lyrics bragged about driving a $50,000 car; now that might just be a Toyota Sienna.
your income limits
These car cost restrictions are largely being obliterated by new restrictions on buyer income levels. The EV tax credit is only available to buyers whose modified adjusted gross income for the year of purchase is no more than $150,000 for a single applicant; $225,000 for a householder; or $300,000 if you file a joint statement. These aren’t exactly poverty incomes, but they will exclude some of the most ardent EV evangelists in the wealthiest metropolitan areas (PDF).
The next set of hurdles is eyeglass politics in international trade.
Built in America or wherever we want
Regardless of vehicle cost or your income, cars whose batteries are assembled in or made from materials sourced from “foreign companies of concern” will be in hot water. Such things are well beyond my expertise, but the law firm White & Case states that they will redline countries specified in the Infrastructure Investment and Employment Act, such as China, Russia, Iran and North Korea. This ban is stark in an auto industry heavily dependent on China, and perhaps explains why it won’t come into effect until December 31, 2024.
Complementing this requirement is a new requirement that requires a qualifying electric car to be assembled in North America, spread across a large number of plants in Mexico, the United States and Canada. This isn’t an entirely strange concept, as cars sold in the US have long had window decals indicating where their major assemblies were assembled.
But wait, there’s more – a lot more
A duplication of the previous two new rules affects the content of critical materials in any qualifying electric vehicle, 40% of which must be from US sources or from countries with which the US has a free trade agreement. That sourcing percentage increases to 50% in 2024, 60% in 2025, 70% in 2026, and 80% by 2027. Tesla is among those automakers that’s been busily securing battery supply deals lately wherever they can find them be able.
I love used cars and so does Uncle Sam
I’m a big fan of the latest generation used cars, so I’m excited about the $4,000 or 30% of the purchase price tax credit for used EVs that cost $25,000 or less. There are separate buyer income limits for used cars of $75,000 for a single applicant, $112,500 for a householder and $150,000 for joint applicants.
Not just pure electrics
The new program also includes plug-in hybrids as long as they have a battery with a capacity of 7 kWh or more, which is comparable to vehicles such as a 2022 Toyota RAV4 Prime PHEV with an 18 kWh battery or a Ford Escape PHEV from In 2022, with 14 kWh, the battery can easily be surpassed. Be wary of an older plug-in hybrid, however, as they may have smaller batteries that don’t quite make the cut. The IRS maintains a list of all plug-in vehicles that are eligible for a federal tax credit.
Better than a deduction
And remember, these are tax credits that directly reduce the amount of tax you owe on your annual income, not just an additional amount you owe at tax time. This differs significantly from the typical income tax deduction, which allows you to reduce the amount of income on which you owe taxes. These EV tax credits are considered to be a much more effective money-saving tool, but can only bring your income tax down to zero for the year; You cannot create a refund.
This pack will create a much friendlier EV buying landscape in a few years, but until then, a virtual desert. Trade groups and industry analysts say that between 70% and even 100% of EVs currently sold in the U.S. will initially be ineligible, a stark reality as we await a deluge of tax credits towards the end of 2024.