The Inflation Reduction Act revamps the electric vehicle tax credit
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It seems like good news is few and far between these days, but the passing of the Inflation Reduction Act (IRA) finally brings the U.S. a little hope. This bill will help bring the United States into a sustainable future, incentivizing things like clean energy, electric vehicles (EV), and sustainable infrastructure.
This bill has far-reaching implications from renewable energy to healthcare, but one of the most talked about is the incentives for electric vehicles. People looking to switch to EVs can take advantage of the redesigned Clean Vehicle Tax Credit, or the brand new tax credit for used EVs.
But, not all the changes for EVs are going to benefit car buyers right away. In fact, it might take a bit for the electric vehicle industry to meet some stringent new requirements.
Before the Inflation Reduction Act was signed, the federal EV tax credit was based on the size of the car's battery, in kilowatt-hours, for a total incentive of up to $7,500. There was also a limit on what cars qualify, based on the number of EVs sold by the manufacturer - only the first 200,000 EVs sold per manufacturer could take advantage of the tax credit.
For electric vehicles purchased after the signing of the IRA, but before the start of 2023, these same rules still apply. However, there is now an additional requirement. EV's purchased between August 16, 2022, and December 31, 2022, must be assembled in North America, in addition to the existing eligibility requirements.
Right now, some vehicles that meet the current EV tax credit requirements, including the new North American assembly criteria, are the BMW 330e and xDrive45e, certain Ford EV models, the Nissan Leaf, and the Mercedes EQS. Rivian and Lucid EV pre-orders also qualify.
The new version of the EV tax credit established by the Inflation Reduction Act applies to electric cars put in service after December 31, 2022. The credit can be applied to your federal income taxes or be transferred to the dealer upfront to reduce the cost of an EV.
You can potentially earn an EV tax credit up to $7,500, but it is limited to how much you owe in taxes. Any additional value of the tax credit cannot carry over to the next year.
Technically, the new EV tax credit is made up of two parts: you earn $3,750 if the car’s battery meets critical mineral requirements, and another $3,750 if the battery meets component requirements. If the car doesn’t meet one of these criteria, you will only get $3,750 instead of the full $7,500.
Starting in 2023, to be eligible for $3,750, 40% of the critical minerals within the battery must originate within the U.S. or from a country with a free trade agreement with the United States. This percentage increases every year until 2028 when 80% of the critical minerals must meet the requirement.
The other $3,750 hinges on a certain percentage of battery components being manufactured or assembled in North America. By 2023, that percentage is equal to 50%. Like the critical minerals requirement, the percentage increases every year until 2028, when 100% of battery components must be North American made or assembled.
Basically, a majority of your car battery minerals must be sourced from and assembled within North America to get the total $7,500 credit. These guidelines are still being developed, and the metrics will be more challenging to hit year over year, as the bulk of minerals and metals for batteries are mined in countries that don't have free trade agreements with the U.S., like China. This makes it a bit hard to predict what cars qualify for the tax credit, or what ones will in the future.
The Act establishes an EV tax credit that goes into effect for cars put into service after December 31st, 2022 through the end of 2032. But you don't get the credit with every EV out there. In fact, not all people even qualify for the tax credit. Much like all good things, the Clean Vehicle Tax Credit comes with a few caveats.
To ensure that this credit is helping those that need it the most, there is an income requirement. For a single tax filer, you cannot claim the Clean Vehicle Tax credit if your income is above $150,000.
Couples who file jointly have a cap of $300,000. For someone filing as head of household, who can claim dependents and earns over half of the household income, earnings have to be less than $225,000 to qualify.
The credit is meant to ease the burden of buying an EV on everyday Americans. Because of this, the IRA instated an MSRP limit to prevent the tax credit from being used to buy luxury EVs, where price likely wasn't a deciding factor in the purchase.
This means the price of the car determines if you can claim the EV tax credit. The MSRP guidelines are as follows:
If you've had your eyes on a Tesla, the Model 3 would meet the MSRP requirement, while the Tesla Model X would not. So, definitely don't rush out to buy a luxury car and expect to get a tax break. The tough part that needs to be finalized for Tesla is whether the materials within the battery meet the critical minerals and assembly requirements necessary for the full tax break.
Buy luxury in 2022. The MSRP requirements don’t go into effect until 2023. So, if you’re looking to purchase a luxury EV that is manufactured in North America, the time to purchase it is now. The same goes for the income requirement. If you exceed the income limit for the 2023 EV tax credit, consider purchasing a qualifying vehicle before the new year.
Starting immediately, the IRA dictates that the "final assembly" of the car must also be within the U.S., Canada, or Mexico. So you can't dig up all of the minerals in the U.S., manufacture the battery here and then ship the battery across the ocean to be added to a car there.
This means that car manufacturers with factories that assemble cars within the United States, like Ford and Tesla, will meet the requirements to get a tax credit easier than manufacturers overseas. Based on available data, after 2023, you cannot get a credit on your car if the battery within it is not also assembled within the U.S. with appropriately sourced minerals.
While these eligibility requirements are designed to increase manufacturing and support U.S.-made goods, this might hinder the ability of consumers to take advantage of this credit because mining and manufacturing are not yet at scale in the U.S. to meet EV demand.
One of the IRA's most exciting changes to the EV tax credit is that you can transfer the credit to the car dealer at the point of sale to cover the down payment or reduce the upfront cost of the vehicle. This allows the price of the car to be reduced immediately, as opposed to having to wait to get the money back when you file your taxes.
Another big change to the tax credit is that starting in 2023, there will no longer be a cap on how many cars from specific manufacturers can qualify for the tax credit. Under the previous tax credit, only the first 200,000 cars sold by a manufacturer were eligible for the credit.
Tesla, GM, and most recently Toyota had reached the 200,000 thresholds, meaning any new purchases of EVs from these manufacturers could no longer receive the tax credit. With the passing of the IRA, you can claim the credit for cars from these manufacturers again, so long as they meet the other qualifications.
Aside from revamping the new EV tax credit, the Inflation Reduction Act created a tax credit specifically for the purchase of used electric vehicles. The Previously Owned Clean Vehicle tax credit will be worth 30% of the sale price, or $4,000, whichever is less.
Not all used electric vehicles are eligible for the incentive. In order to get the tax credit, it must meet the following criteria:
The used EV tax credit also has income limits. You cannot receive the incentive if the gross income of a single filer is above $75,000, or above $150,000 for joint filers.
Once the rules are set for the material and mineral stipulations, the picture will become clearer for which cars this credit will apply to.
We wish we had some concrete examples to give you, but the specific guidelines for the EV tax credit are still being outlined. The plans are set to be finalized at the end of 2022. But, based on what we know, we can make some educated guesses.
It is likely that some Tesla models, the Ford electric vehicles, and the Chevy Bolt can qualify for the new tax credit in 2023 because they are assembled in the United States.
Keep in mind that being assembled in North America is not the only piece of the puzzle. The minerals that make up the battery also need to be sourced within the U.S. or from countries with a free trade agreement. Manufacturers don’t typically report this information, so there’s no way to gauge exactly where battery minerals are coming from.
Car manufacturers were already planning to expand assembly plants and battery factories within the United States to meet demand, and this bill might be the final push for more.
With all of the stipulations for an EV to qualify for the credit, it might seem like a losing battle. But as more car companies take advantage of the manufacturing incentives within the IRA, we can assume that more production facilities will be added in the United States, increasing the number of cars that can qualify for the credit.
The intent of passing this legislation is to make renewable energy and electric vehicles more affordable for a larger group of Americans. The EV incentives will help make the choice between a new combustion engine vehicle and an EV easier for car buyers.
It is important to note that charging an EV with solar panels is the cheapest way to power a car. You can charge your car for under $500 a year, versus spending thousands of dollars on gas. If you are eager to switch to renewables, the tax credits available under the Inflation Reduction Act will reduce the upfront cost, but also reduce costs over your lifetime.
Reducing the upfront cost of the vehicle is probably the best thing to come out of this. Because the EV tax credit cannot be carried over year after year, if you do not owe $7,500 in taxes, you will not get the full amount back. So having the ability to use that money as a down payment instead will go a long way for Americans.