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One of the main talking points of the Inflation Reduction Act is its impact on incentivizing people to buy an electric vehicle (EV). This $369 billion bill, signed into law on Aug. 16, 2022, by President Joe Biden, features a number of federal provisions aimed at tackling climate change, keeping EVs affordable, and boosting American industry. Nevertheless, some of them, however well intended, may have unintended results, with some industry commentators concerned that no current vehicles will qualify for the revised EV tax credit due to its strict price limits and the made-in-America requirements that go into effect in Jan. 2023.

Key Takeaways

  • The Inflation Reduction Act brought some significant changes to the EV tax credit, a federal incentive to encourage people to purchase electric vehicles.
  • Those who meet the income requirements and buy a qualifying vehicle are eligible to receive up to $7,500 from the government.
  • The credit now applies to any “clean vehicle” and can be used on pre-owned autos.
  • However, restrictions have also been added—including income thresholds, price limits, and a stipulation that all qualifying vehicles be made in America—some of which may be counterproductive.

What Is the Electric Vehicle (EV) Tax Credit?

The EV tax credit is a federal incentive designed to encourage people to purchase EVs. Residents who meet the income requirements—and buy a vehicle that satisfies the price, battery, and assembly restrictions—are eligible to receive up to $7,500 from the government in the form of a tax credit.

This incentive has been around in various guises for years as politicians have scrambled to tackle pollution and promote the use of cleaner energy. Its latest version, signed into law with the Inflation Reduction Act, carries some important changes that will begin kicking in from the start of 2023 until the end of 2032.

What’s Changed Under the Inflation Reduction Act?

The Inflation Reduction Act introduced a number of major tweaks to the existing EV tax credit. Noteworthy changes include:

No more $200,000 cap

Previously, there was a cap in place that prevented each automaker from selling more than 200,000 vehicles in the United States with the EV tax credit. That limit—which made it difficult for consumers to buy EVs from popular manufacturers such as Tesla and General Motors at a discount—has now been scrapped.

Any ‘clean vehicle’

Under the old system, the EV tax credit of $7,500 was applied to a narrower range of cars. Those buying a pure EV stood to qualify in full from the credit, whereas a purchaser of a plug-in hybrid or hydrogen fuel cell car could receive less than half that or, in some cases, nothing at all.

The government is no longer as fussy. The EV tax credit is now referred to as the “clean vehicle credit,” as its reach has been extended to include other forms of green autos, such as fuel cell vehicles.

Instant payment

Another positive development is that the tax credit, starting in 2024, can be cashed in at the point of sale. Previously, the benefits were realized on your tax return. Soon it will no longer be necessary to wait until tax time to take advantage of this incentive: You’ll be able to discount the credit amount directly from your auto’s purchase price.

Starting in 2024 car buyers can transfer the credit to dealers at the point of sale and enjoy a direct reduction in the purchase price.

Income restrictions

Wealthier buyers will no longer qualify for the EV tax credit. Under the new law, the credit is not open to those whose taxable income surpasses the following thresholds:

  • Single filers – $150,000
  • Joint filers – $300,000
  • Heads of household – $225,000

Made-in-America restrictions

For a vehicle to be eligible for the EV tax credit, it must have been assembled—and have a battery built—in North America, with battery minerals mined or recycled on the continent. The first requirement goes into effect immediately, whereas the latter is being phased in. By 2024, at least 50% of EV batteries must come from the U.S., Canada, or Mexico, with that figure rising to 100% by 2028.

The goal, it would appear, is to limit China’s influence on supply chains and boost domestic jobs and manufacturing. That objective isn’t a new one and can be viewed as a positive for Americans. It may also be a bit optimistic.

Industry spokesman John Bozzella, chief executive officer (CEO) of the Alliance of Automotive Innovation—a trade organization based in Washington, D.C., whose membership includes foreign automotive and truck manufacturers with U.S. assembly plants—argues that North America currently doesn’t have the infrastructure to source and build batteries on a scale similar to China. What’s more, he thinks it probably won’t have the capacity for some time yet.

Bozzella insists that it could take years to meet these battery requirements, with the result that initially no vehicles would qualify for the purchase incentive. The group wants “a more gradual phase in of the battery component, critical mineral and final assembly requirements” and supports “expanding the definition of eligible countries from which batteries, battery components and critical minerals can be sourced to include nations that have collective defense arrangements with the United States, like NATO members, Japan and others.”

The Alliance of Automotive Innovation, a global trade organization, has claimed that the EV tax credit’s made-in-America requirements for cars and batteries, as well as price limits on cars, will result in no cars being eligible for the credit when it first kicks in, due to the current lack of manufacturing capacity in North America.

Price limits

Another element of the bill that would prevent some Americans from taking advantage of EV tax credits is price restrictions. EVs are known to be expensive, costing, according to Kelley Blue Book estimates, an average of about $66,000. Yet, under the new law, it will no longer be possible to qualify for a tax credit if you buy a “clean” sedan, hatchback, or wagon for more than $55,000 or a “clean” truck, SUV, or van for more than $80,000.

These price restrictions leave consumers hoping to take advantage of this break with fewer options from which to choose. It could be argued that automakers might now be encouraged to lower their asking prices or make more lower-priced models. However, counting on that happening while supply chain disruptions persist, prices of materials continue to rise, and new expenses to manufacture batteries and assemble autos in North America are tacked on may be optimistic.

Used vehicles now qualify

In the past, EV tax credits were only obtainable when buying new vehicles. That’s now changed under the Inflation Reduction Act, which in 2023 will introduce a tax credit for pre-owned “clean vehicles” that are two or more years old, cost $25,000 or less, weigh under 14,000 pounds, and are purchased from a dealer. The credit covers up to 30% of the purchase price and is capped at a maximum of $4,000.

Again, you won’t currently find many options in that price range. However, that could be subject to change as the market matures. Notably, used vehicles don’t need to comply with the made-in-America requirements.

How Do I Claim the Electric Vehicle (EV) Tax Credit?

If you meet the income requirements and buy a qualifying vehicle, you must claim the EV tax credit on your annual tax filing for 2022 and 2023. However, starting in 2024 you can discount it from the purchase price when buying your vehicle.

How Do I Know if an Electric Vehicle’s Final Assembly Occurred in North America?

There are a few ways to determine if an electric vehicle was assembled in North America and, therefore, qualifies for the tax credit. One option is to check the U.S. Department of Energy’s Alternative Fuels Data Center’s (AFDC) list of electric vehicles that likely meet the requirements. Another is to enter the 17-character vehicle identification number (VIN) into the National Highway Traffic Safety Administration’s VIN Decoder tool.

When Do the New Electric Vehicle Tax Credit Rules Come Into Effect?

The only change that takes immediate effect from Aug. 16, 2022, is the North America final assembly requirement. All other new legislation will be phased in gradually, starting as of Jan. 1, 2023.

The Bottom Line

Americans are increasingly learning that driving an EV can save them money in the face of rising gas prices. That the EV tax credit has been extended, can be reimbursed immediately, widened its scope to include other types of “clean vehicles,” got rid of the $200,000 cap, and is now also applicable to used cars are all positive steps forward in the quest to tackle pollution. Those plus points, however, may be undercut by other provisions in the Inflation Reduction Act.

The Alliance for Automotive Innovation puts at 72 the number of electric, plug-in hybrid, and fuel-cell EVs currently available for purchase in the U.S. Worryingly, it claims that none will be eligible for the tax credit once the bill’s new price caps and full made-in-America rules take effect in January 2023. It also predicts that the American automotive industry will be unable to produce new models that will satisfy the requirements in time to meet the deadline. If that warning proves to be accurate, adjustments will need to be made by Congress to widen eligibility if it wants to get people driving EVs.

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