What the new EV tax credits in the Inflation Reduction Act mean for you
It’s been a big couple of weeks for electric vehicles. You may have heard about the Inflation Reduction Act (IRA) which includes the new federal EV tax credit and has now been signed into law by President Biden.
The new EV tax credit has spurred confusion among interested consumers. We’d like to help answer what the IRA means for EV consumers over the coming days, weeks and months. If you’re interested in purchasing an EV, there are a few things you need to know.
What are the differences between the current EV tax credit and the new credit?
The current federal tax credit provides up to $7,500 for the purchase of an electric vehicle. Battery electric vehicles (BEVs) are generally eligible for the full $7,500. Plug-in hybrid vehicles (PHEVs) may be eligible for less, depending on their battery size. Each manufacturer can sell up to 200,000 eligible vehicles under the current credit. Additionally, the current credit can only be claimed on a consumer’s taxes for that year. (Meaning you may not see the benefit of the credit until many months after purchase.) As President Biden signed the IRA into law, the old credit no longer applies in the same way (we dig into more details on that below.)
In contrast, the new $7,500 EV tax credit is split into two equal halves of $3,750. In order to be eligible for the new credit, vehicles and consumers must meet certain requirements:
- A vehicle is eligible for one-half of the total credit ($3,750) if the vehicle has battery components that are manufactured or assembled in North America.
- To be eligible for the other $3,750, a vehicle must have critical minerals that were extracted or processed in the U.S. or countries with which the U.S. has a free trade agreement, or use critical minerals that were recycled in North America.
- Final assembly must take place in North America for a vehicle to be eligible.
- Only cars under $55,000 or SUVs, vans, and pickup trucks under $80,000 are eligible for the credit.
- On the consumer side, the income cap to be eligible for the credit is $150,000 for single filers, $225,000 for head of household and $300,000 for joint filers.
- There will be an option to apply the new credit at point of sale starting in 2024.
- The new credit requirements for battery components and critical minerals will take effect January 1, 2023.
Additionally, the IRA established a used EV tax credit. The used EV tax credit is for $4,000 or up to 30% of the vehicle price (whichever is lower.) The used EV tax credit has a few requirements:
- The vehicle must be under $25,000.
- The vehicle model year must be at least 2 years old (based on when the consumer is purchasing the used vehicle.)
- In order to be eligible, the vehicle must be sold by a dealer.
- As with the new EV tax credit, the used EV tax credit has income caps for consumers. The income cap to be eligible for the used EV credit is $75,000 for single filers, $112,500 for head of household and $150,000 for joint filers.
- The credit can only be applied once per vehicle.
- The used EV tax credit will take effect January 1, 2023.
What does this mean if I’m looking to buy an EV?
The old tax credit is still in effect from now until December 31, 2022. However, some things have changed and the selection of eligible vehicles is smaller than before.
- The maximum credit amount through the end of 2022 remains $7,500.
- In order to be eligible, vehicles must now meet the North American assembly provision. Vehicles must undergo final assembly in North America. Other vehicles are no longer eligible.
- Additionally, the manufacturer cap still applies. This means that manufacturers that have already reached the cap will not have eligible vehicles until 2023. This includes Tesla and GM. Toyota is expected to begin its phase out on October 1, 2022, which means that its vehicles would only be eligible for 50% of the credit beginning on that date–and only if they also meet the North American assembly requirements.
- The Department of Energy Alternative Fuels Data Center has compiled a list of vehicles that meet the North American assembly requirements under the current credit. This list will continue to be updated as manufacturers submit data and confirm final assembly locations for their vehicle models.
- See the IRS website for a detailed breakdown of the transition period rules through the end of the year.
- Note that existing state and local incentives are unchanged. Visit PlugStar.com for more information on available incentives.
- The used EV tax credit will not be available until January 1, 2023.
Starting in 2023:
- The new federal tax credit will be available for eligible vehicles and consumers. As discussed above, the requirements for eligibility are more complex than the current credit and it is unclear right now which vehicles will be eligible.
- Some of the requirements, especially the critical minerals requirement, will be difficult for manufacturers to meet in the short-term and it is likely that few vehicles may qualify for the new credit in 2023.
- The new credit will be available through 2032 for all manufacturers.
- The used EV tax credit will also be available for eligible vehicles and consumers.
- We will provide more detailed guidance on the 2023 credit later, when it is clearer which vehicles will be eligible.
- If you are considering a Tesla or GM vehicle, they are not eligible for the credit today but some of them may be eligible in 2023. We don’t know yet.
- If you are considering a vehicle from any other manufacturer, some models are currently eligible, but whether they remain eligible in 2023 is also still known.
Should you rush out and buy an EV today in order to claim the federal tax credit? Only you can decide that, but hopefully you now have a better sense of what the IRA means for buying an EV over the coming months. As we learn more, we will continue to share helpful information to inform your EV future.
Disclaimer: Plug In America offers this information as our best interpretation of the IRA and does not guarantee its accuracy or that what we have shared will ensure a consumer will be eligible for any tax benefit.