In an effort to expand the affordability of energy-efficient vehicles for U.S.consumers, the Inflation Reduction Act made changes to the tax credit for all-electric cars and hybrid plug-ins.
A $7,500 credit was previously authorized in 2008 and 2009 federal legislation to broaden the adoption of electric cars.
President Biden signed the Inflation Reduction Act into law on Tuesday. Under the new law, a tax credit of up to $7,500 for buyers of new EVs is extended through 2032. The Act also provides a separate tax credit worth a maximum of $4,000 for used versions of these vehicles.
The IRS issued guidance for the availability of the EV credit on Tuesday, detailed below. The IRS has stated that it will issue additional guidance in the coming weeks and months.
Hybrid plug-ins and all-electric cars of all sizes have a manufacturer’s suggested retail price threshold to qualify for the credit under the Inflation Reduction Act:
- Sedans must have a manufacturer’s suggested retail price below $55,000; and
- SUVs, trucks and vans must be priced under $80,000.
In addition to price restrictions, there are income limits for eligibility based on modified adjusted gross income. The income ceilings for each filing type are as follows:
- Single tax filers with a MAGI above $150,000;
- Married filing jointly with a MAGI above $300,000; and
- Single filing as head of household with a MAGI above $225,000.
EV credit limitations for used vehicles
The most important restriction for qualification for a new EV tax credit for used vehicles is that they must be at least two model years old.
The credit amounts to either $4,000 or 30% of the EV’s price — whichever is less — and the price must be less than $25,000.
There are income caps here as well. Individuals with income above $75,000 would be ineligible for the credit. Cap is $150,000 for joint filers and $112,500 for heads of household.
Credit limits based on assembly or manufacturing location
Other key requirements for full or partial credit availability include the requirement that the vehicle’s final assembly and manufacture or assembly of certain battery components must be in North America.
For an EV buyer to qualify for the full credit now, 40% of the metals used in a vehicle’s battery must come from North America. By 2027, that required threshold will be 80%.
If the metals requirement is not met, the automaker and the EV buyers would be eligible for half the tax credit, $3,750. The rules get more restrictive in later years.
IRS guidance on final assembly requirement
Vehicles purchased after Aug. 16, 2022: The IRS indicates that taxpayers purchasing after Aug. 16, 2022, may claim the EV credit only for qualifying electric vehicles for which final assembly occurred in North America.
The Department of Energy has provided a list of Model Year 2022 and early Model Year 2023 electric vehicles that may meet the final assembly requirement. Because some models are built in multiple locations, there may be vehicles on the Department of Energy list that do not meet the final assembly requirement in all circumstances.
To identify the manufacturing location for a specific vehicle, please search the vehicle identification number of the vehicle on the VIN Decoder website for the National Highway Traffic Safety Administration. The website, including instructions, can be found at VIN Decoder.
Vehicles purchased before Aug. 16, 2022: If a taxpayer entered into a written binding contract to purchase a new qualifying EV before Aug. 16, 2022, but does not take possession of the vehicle until on or after August 16, 2022, the EV credit rules in effect before Aug. 16 apply.
The final assembly requirement does not apply to EVs purchased before Aug. 16, 2022.
Vehicles purchased and delivered between Aug. 16 and Dec. 31, 2022. Taxpayers who purchase and take possession of a qualifying EV after Aug. 16, 2022, and before Jan. 1, 2023, must follow the EV credit rules in effect before the Inflation Reduction Act as long as the final assembly rules described above are met.
Credit phase-out eliminated
Legislation in 2008 and 2009 creating the $7,500 credit imposed a phase-out of the tax credit once a manufacturer reached 200,000 vehicles sold. The Inflation Reduction Act eliminates that restriction.
Auto industry concerns
Some industry experts are concerned that the new EV credit rules under the Inflation Reduction Act will hurt EV sales, primarily because of the new manufacturing and battery parts location and income requirements. The Alliance for Automotive Innovation, which represents automakers producing nearly all of the cars and light trucks sold in the U.S., has stated that 70% of electric vehicles currently sold in the U.S. would be ineligible for the tax credits.