Thanks to the Inflation Control Act, the federal tax credit for electric vehicles has changed. The $7,500 deduction from the cost of new vehicles can still be claimed, but the eligibility criteria have undergone an overhaul. There are a lot of changes, some good and some bad, but the main thing buyers need to know is that the list of eligible cars is now much smaller than it used to be.
We heard that the electric vehicle tax credit would change a few weeks ago, as part of the Inflation Cuts Act, which President Joe Biden just signed into law on August 16. While it was originally stated that changes to credit would not occur until January 1, 2023, some of them It has already entered into force (Opens in a new tab).
Here’s what you need to know about the new electric vehicle tax credit – now known as the clean car credit.
What are the previous eligibility criteria?
Previous tax credit rules for electric vehicles were too lenient. The main qualification was that the vehicle weighed less than 14,000 pounds, had a battery with a capacity of at least 5 kWh and could only be recharged by plugging it in. This applies to electric and hybrid cars, with credits ranging from $2,500 to $7,500.
To qualify for the $7,500 full credit, a vehicle must have at least 70 miles of battery range and combined CO2 emissions of less than 50g/km. Since every electric vehicle on the market meets these criteria, it has only really affected plug-in hybrids.
Cars also ceased to be eligible once they reached a sales ceiling of 200,000 eligible vehicles. But only three companies have actually made it that far: Tesla, General Motors and Toyota.
What are the new eligibility criteria for the electric vehicle tax credit?
The Inflation Reduction Act sets out various changes to the electric vehicle tax credit, some effective immediately, and some not. All of this is astounding, with the overall goal of encouraging electric vehicle adoption and bringing more electric vehicles and battery production to the United States.
As of August 16, the vehicle must have undergone final assembly in North America (US, Canada, and Mexico).
Renaming the Expanded Balance to “Clean Car Balance” isn’t just a linguistic boom either, because it would apply to any “clean car” car. Basically, these are electric and plug-in hybrid cars, but they also include hydrogen fuel cell cars that meet all other criteria. However, hydrogen cars are rare, and the models already for sale in the US are all assembled in Asia, which means nothing qualifies at this time.
What eligibility changes are coming in the future?
The most anticipated change regarding the electric vehicle tax credit is that the 200,000-unit sales cap will be raised on January 1, 2023. This means that any new vehicle made by Tesla, General Motors, or Toyota, which meets all other eligibility requirements, will be entitled to a tax credit of $7,500 in full.
But that will depend on those cars meeting other incoming eligibility criteria, which will start to get very stringent in the new year. The details of these standards have not been officially confirmed, and it is up to the IRS to work out and determine exactly what changes.
From what we’ve heard so far, one of the changes will be a tax credit cap based on the price of the car and the income of the person who bought it. Cars with an MSRP of more than $55,000 will not qualify, while trucks have a ceiling of $80,000. Individual taxpayers earning more than $150,000 will also not qualify, although that number rises to $225,000 for heads of household and $300,000 for joint filings.
It is said that the biggest obstacle to claiming the tax credit will begin in 2024, when tougher US-made conditions will enter. Previous reports indicated that this would require 40% of battery material to be sourced from North America or from a country with which the United States has a free trade agreement. By 2029, this will extend to insisting that 100% of battery components are made in North America.
Any batteries containing metals that are “mined, processed or recycled by a foreign interested party” will not be eligible. This category currently includes China, which It is said to control about 79% (Opens in a new tab) of the world’s largest lithium-ion battery manufacturing capacity.
Finally, starting in 2024, it will be possible to claim your tax credit at the point of purchase, giving buyers an actual rebate. However, this will be limited to authorized dealers, and therefore will not be universally applicable.
What cars qualify under the new rules?
The US Department of Energy has Released a list of cars (Opens in a new tab) Final Compiled in North America, and may meet current tax credit criteria. It’s not as extensive as the previous list, but it does include a number of plug-in hybrid and electric (PHEV) vehicles.
This list is not final, and more cars would qualify if production were brought to North America.
In total, there are nine electric cars and 10 plug-in hybrids that may now qualify – for a total of 19. That’s just under the 72 cars that qualified before August 16.
Here are nine electrified cars assembled in North America, but currently only ineligible because the manufacturer has already hit the 200,000 sales cap. Provided they meet all other criteria, these cars could be eligible for a tax credit in 2023.
It’s worth noting that a number of the cars on the list cost more than the $55,000 and $80,000 sales caps. For example, the Lucid Air starts at $87,400, while the Cadillac Lyriq starts at $62,990. Assuming these caps remain in place, this means that the list of eligible electric vehicles will become shorter.
It is also worth remembering that these cars may be Meet the final assembly requirements. Since automakers can build their cars in multiple locations, this may not be the case for every car produced.
That’s why the government advises you to check the VIN number of the car through NHTSA VIN . decode (Opens in a new tab) a tool. This will confirm the manufacturing location of that individual vehicle.
What if you just ordered an electric car but you haven’t received it yet?
The waiting list for new cars is very long at the moment, whether they are electric or not. Supply chain issues have had a huge impact on the auto industry, so there may be a huge gap between ordering and delivering a vehicle. If you’re one of those people, the news that the tax credit is changing now can be a little worrying — or upsetting, depending on your actions.
But there is good news for these people, because According to the IRS (Opens in a new tab) You can still claim the tax credit under the old rules prior to August 16th. This applies to anyone who “has entered into a binding written contract to purchase a new eligible electric vehicle before August 16, 2022, but does not acquire the vehicle until or after August 16, 2022.”
The “Written Binding Contract” part means that this does not apply to people who have booked a car or made a refundable deposit. According to the IRS, you must have separated a “significant” non-refundable deposit or down payment before August 16. The agency specifies this as at least 5% of the final price.
How about a tax deduction for a used electric car?
So far, incentives for electric cars have focused on new models, limiting savings for people who can buy a brand new car. This limits adoption, more so when you remember that electric vehicles are generally more expensive than their gas-powered counterparts.
So, on January 1, 2023, used electric cars will be eligible for their own tax credit. Provided they cost no more than $25,000, ie. The credit is up to $4,000, or 30% of the vehicle’s total cost, whichever is lower. The credit applies only to used cars that are at least two years old, and cars that were specifically purchased for resale will not be eligible.
So far there is no word on the limitations based on the manufacturer or assembly location. But this could change.
So selling a used Tesla for more than MSRP will likely not qualify, and you won’t be able to write off most of the cost of the old Nissan Leaf you spotted on Craigslist. The IRS will undoubtedly release more specific information in specific language and criteria in the coming months.