With the passage of the Inflation Reduction Act through Congress, major changes are coming to the state electric car tax credit. The details are more complex than ever, but could 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, there is good news for electric vehicle buyers.
Credit extended to 2032
The new rules again authorize a $7,500 tax credit for full batteries or advanced plug-in hybrids through 2032. This fundamental decision protects a program that has been in place since 2010 and has been targeted by some politicians and at least one political group. As a convenient gift for petroleum electric car manufacturers and wealthy car buyers.
No more popularity penalties
The new rules remove the limit suspending the tax credit for any car if it sells 200,000 units of eligible electrified passenger vehicles. This “popularity penalty” has been negated by automakers like Tesla and GM, who long ago sold over 200,000 units and are now effectively playing the game at a $7,500 handicap. Ford and Toyota are also in the final stages of tax credits. While there are economic and industrial arguments on both sides, raising the 200,000-unit cap is clearly a benefit for car buyers who only want to select the cheapest cars.
It’s been a while since I’ve seen any mention of a federal tax credit on the Tesla order page. This may change soon.
If you choose a qualifying EV, you can immediately apply the tax credit to the dealership by giving them your credit at the time of signing, just as buyers often do with manufacturer discounts. This saves you from waiting until tax day to receive benefits. You must still qualify for the credit at tax time, and the IRS may withhold some or all of the amount if you don’t, but a little math on the back of the envelope should make this clear at the time of purchase. .
So much for the obvious good guys, now the new rules get tricky.
purchase price range
Forget paying to buy a Porsche Taycan or Tesla Model S: the new rules only apply to cars costing $55,000 or more. lowor SUVs and light trucks that cost $80,000 or more. is low, automakers should lose some sleep over this as buyers are very sensitive to low costs above these price points. But it’s worth noting that the median purchase price of a new vehicle in the US rose dramatically in May to around $48,000. I remember when rap lyrics claimed driving a $50,000 car; Now that could just be a Toyota Sienna.
your income limit
These caps on car costs are being largely controversed by the new caps on the buyer’s income level. The EV tax credit is only available to purchasers whose modified adjusted gross income does not exceed $150,000 for a single claimant in the year of purchase; $225,000 for the householder; or $300,000 if filing a joint statement. These aren’t exactly poverty-stricken incomes, but they will displace some of the most passionate EV activists in the wealthiest metropolitan areas (PDF).
The next set of restrictions are the policies surrounding international trade.
Made in America or wherever we prefer
Regardless of the cost of the vehicle or your income, car batteries whose batteries are assembled or made from materials sourced from “concerning foreign companies” will be in hot water. Such things are beyond my expertise, but the law firm White & Case says they will reallocate countries listed in the Infrastructure Investment and Jobs Act, such as China, Russia, Iran and North Korea. The ban comes in an auto industry that’s heavily dependent on China, which may explain why it won’t come into effect until December 31, 2024.
The Chevy Bolt is assembled in the United States, but is not eligible for a federal tax credit unless at least 40% of its battery content comes from the United States or its free trade partners.
Meeting this requirement is a new requirement that requires a qualified electric car to be assembled in North America, extending to a large number of plants in Mexico, the US and Canada. It’s not an entirely strange concept, as cars sold in the US have longer window decals to indicate their key assemblies have been put together.
But wait, there’s more
A duplication of the previous two new rules is to control the critical material content in any eligible 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 will increase to 50% in 2024, 60% in 2025, 70% in 2026, and 80% by 2027. Tesla is one of the few automakers that’s been busy bagging battery supply deals lately, wherever they are are to be found.
I love old cars and so does Uncle Sam
I’m a big fan of the latest generation used cars, so I’d appreciate a $4,000 tax credit or 30% of the purchase price for used EVs that cost $25,000 or less. There are separate buyer income limits for used vehicles of $75,000 for single applicants, $112,500 for heads of household and $150,000 for joint applicants.
not just pure electrics
The new program also covers 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 the 2022 Toyota RAV4 Prime PHEV with an 18 kWh battery or the 2022 Ford Escape PHEV is easy to overcome. With 14kWh. Battery. Be wary of older plug-in hybrids, however, as they can have smaller batteries that don’t quite make the cut. The IRS maintains a list of all plug-in vehicles that are eligible for the federal tax credit.
A Toyota RAV4 Prime is a plug-in hybrid that might also qualify for a healthy federal tax credit, not just for pure electric cars.
Emme Hall / Road Show
better than cutting
And remember, these are tax credits that directly reduce the amount of tax you owe on your income for the year, not just additional amounts you owe at tax time. This differs significantly from the ordinary income tax deduction, which allows you to reduce the amount of income you wish to tax. These EV tax credits are considered a more powerful money-saving tool, but they can only bring your income tax down to zero for the year; You cannot issue a refund.
This package will create a friendlier EV buying scenario in a few years, but until then it will be a virtual desert. Trade groups and industry analysts say between 70% and 100% of EVs currently sold in the US will not qualify for the first time, a harsh reality as we face a barrage of tax credits in late 2024. waiting.