You may have heard that President Biden is expected to sign the Inflation Reduction Act soon. The massive $739 billion package, passed across party lines in the Democratic-led Senate and House of Representatives, aims to reduce the deficit and eventually inflation by tackling climate change, cutting health care costs and raising taxes on some big companies. And the good news on the EV front is that the EV tax credit is a notable part of the legislation’s focus on clean energy.
Some of the inflation-mitigating law changes to the electric vehicle tax credit aimed at encouraging the use of “clean” vehicles could be seen as a mix of good news and bad news by industry manufacturers. And there are some questions about how the electric vehicle tax credit will work for the rest of 2022. But other changes to the EV tax credit in the Inflation Mitigation Act might be welcomed by some consumers – like you.
Extension of the tax credit for electric vehicles
First and foremost, for electric vehicles placed in service after December 31, 2022, the Inflation Mitigation Act extends the tax credit of up to $7,500 for 10 years — until December 2032. The exact amount of the credit is based on a calculation that takes into account Factors such as procurement and assembly of the vehicle. Additionally, used electric vehicles (ie, previously owned clean vehicles that are at least two years old) are now eligible for a separate tax credit of up to either $4,000 or 30% of the vehicle price, whichever is lower. However, a previously owned EV cannot qualify if purchased for resale.
Also, under the Inflation Reduction Act, the EV tax credit will apply to any “clean vehicle.” For example, a hydrogen fuel cell car or a plug-in hybrid vehicle with a battery capacity of four to seven kilowatt hours could be considered. Some commercial clean vehicles may also qualify – depending on their weight.
Another change is that when you buy a clean vehicle, starting in 2024, you will have the option to claim the EV tax credit as a rebate when you buy the vehicle. Essentially, you would transfer the credit to the dealer, who could lower the price of the vehicle by the amount of the loan. That means you don’t have to wait until tax time to take advantage of the EV tax break.
So what happens to the EV tax credit for the rest of 2022? The Inflation Reduction Act offers some relief for buyers of electric vehicles who, starting this year, have entered into written, binding sales contracts to purchase electric vehicles that will be put into service or delivered in 2023. If you bought an EV before the Inflation Reduction Act went into effect and that vehicle is otherwise eligible for the legacy EV tax credit, you can claim that credit.
EV credit income limits and manufacturing requirements
Although the EV tax credit is effectively expanded, the Inflation Reduction Act also sets income limits on who can claim the credit.
If you are single and your modified gross adjusted income is over $150,000, you do not qualify for the EV tax credit. The income limit for married couples applying together is $300,000. And if you register as the head of household and earn $225,000 or more, you won’t be able to claim the loan either.
Vehicle price and type also play a role. Vans, pickup trucks, and SUVs with a manufacturer’s suggested retail price (MSRP) greater than $80,000 do not qualify for credit. For clean cars to qualify for the EV tax credit, the MSRP must not exceed $55,000.
Even if you buy a used, clean vehicle, it only qualifies for the tax credit if it costs $25,000 or less. And in case you’re wondering, for EV tax credit purposes, ‘used’ or ‘previously owned’ means the car is at least two years old.
Speaking of limits, before the Inflation Reduction Act, manufacturers who produced more than 200,000 electric vehicles could not qualify for the EV tax credit, as it expired once the manufacturer reached the 200,000 car cap. The Inflation Reduction Act removes this cap, meaning some cars from manufacturers that have surpassed the 200,000 mark (e.g. General Motors, Toyota and Tesla) are now eligible for the credit.
However, to boost domestic production of clean vehicles, the Inflation Reduction Act also requires final assembly of qualifying clean vehicles to occur in North America. The final assembly requirement is effective from the day President Biden signs the Inflation Reduction Act. There is a similar requirement that minerals and other key components (i.e. battery components) used to manufacture electric vehicles are also primarily sourced from North America.
EV Tax Credit News
North American assembly requirements, along with income limits and price caps, mean there will be several popular clean vehicles that do not qualify for the EV tax credit. There will also be a segment of high-earning car buyers who will not be able to draw the loan.
But until additional guidance is issued, it can be difficult to know for sure if the vehicle you’re considering buying qualifies for an EV tax credit. And whether it’s better (from a tax point of view) to wait next year and buy an electric vehicle, or to make that purchase now.
Keep an eye out for proposed regulations, which are likely to be issued before the end of the year. In the meantime, do your research to learn more about where the electric vehicle you’re planning to buy is sourced and assembled. This can help you determine if it qualifies for the Clean Vehicle Tax Credit of the Inflation Mitigation Act.
[For more information about what’s in the Inflation Reduction Act, see You’ll Save More on Green Home Improvements Under the Inflation Reduction Act, The Inflation Reduction Act and Taxes: What You Should Know and Inflation Reduction Act Will Boost Obamacare Tax Credit.]