Electric Vehicle Tax Credits: More for Some, Less for Others?

The Inflation Reduction Act¹ (IRA) has expanded the existing tax credit for electric vehicles (EVs), adding new rules that go into effect at the end of this year. Do you stand to benefit?

Out with the Old…

Under the old rules originally implemented in 2009, consumers could apply for a nonrefundable tax credit of up to $7,500 on the purchase of qualified electric vehicles. This benefit—which was available only for new cars—had no cap on the vehicle price or the income of the taxpayer. What’s more, only the first 200,000 EVs a company sold qualified. After that point, the benefit phased out. 

In theory, the original law aimed to nurture the industry’s emerging start-up phase by offsetting high production costs. Yet over time, the need for more nuanced legislation became evident. While the current credit system remains in place until the end of 2022, we can explore how the new landscape will look once it renews in 2023.

…In with the New

Enacted for 10 years, the new law will remain in effect from January 1, 2023 through December 31, 2032. Congress set it up as nonrefundable, meaning you can only apply the credits to the taxes you owe in a given year. The new legislation also moves the goal posts for eligibility. Instead of tying it solely to the number of vehicles coming off the assembly line, the IRA introduces fresh requirements linked to the vehicle’s origin, along with caps on the buyer’s income and the vehicle’s price.

Made in North America:

To promote domestic manufacturing, vehicles must be locally sourced to receive the tax rebate. More specifically, to initially qualify, the vehicle’s final assembly must take place somewhere in North America (i.e., within the United States or our free trade partners Canada and Mexico). Then, starting in 2024, two additional sourcing standards kick in—each counting towards $3,750 (or 50%) of the credit. The first stipulates that at least 40% of the vehicle’s critical minerals must originate or be processed in North America. Notably, this amount increases by 10% annually until it reaches up to 80% in 2027. A second standard covering battery construction requires that at least half of the battery’s components come from North America—or another US free trade partner—with that figure climbing to 100% by 2029.      

Price and Income Caps:

The new law places the following limits on the vehicle’s price (commonly known as MSRP, or manufacturer’s suggested retail price):

• $80,000 for SUVs/vans/trucks
• $55,000 for other vehicle types, including sedans

The US Treasury based these classifications on guidance from the EPA and Department of Energy, so consumers should keep these in mind when narrowing down their choices. The measure also ushered in caps on income. Going forward, the credit will only be available to taxpayers whose annual income does not exceed:

• $150,000 for individuals;
• $225,000 for head-of-household; and
• $300,000 for joint filers.

What About Used EVs?

For the first time, those purchasing used electric vehicles can also apply for a credit. While smaller than the rebate for new vehicles, it’s still meaningful at the lesser of $4,000 or 30% of the purchase price.  Keep in mind, vehicles must be at least two years old, sold directly from a dealership, and cannot exceed $25,000 to remain eligible. What’s more, income caps are significantly stricter, with limits of $75,000/year for individuals and $150,000/year for joint filers. 

Importantly, consumers can only access the benefit once per vehicle (the rebate is tied to the VIN registration). As a refundable credit, purchasers can use it to offset taxable gains, or even to generate a tax refund. For tax year 2023, taxpayers must claim the credit when they file, thereafter it will be a refundable credit deducted at point of sale. 

Timing Your Purchase

Given all the rule changes, what factors should you consider to secure the tax benefit?

First, determine whether the vehicle is already eligible in 2022. Only two manufacturers—Tesla and GM—have had their credits phased out due to quotas. The rebate still applies to other EV manufacturers such as Volkswagen, Rivian, or BMW, but you will need to qualify under the new legislation requirements to get the credit.

Importantly, whether you buy in 2022 or sometime thereafter, make sure the vehicle manufacturer meets the North American final assembly sourcing standards—this provision went into effect as of the bill signing on August 16, 2022. But it only applies to final assembly; the “critical mineral” and “battery construction” requirements don’t kick in until 2024. So, if you have your eye on a foreign-constructed vehicle, consider moving ahead in 2023. Many of them will become ineligible once stricter standards apply.

As a final note, as of the time of publishing, the Senate is considering an amendment to relax the final assembly, critical mineral, and battery component standards. We are following this development closely and will update this article if the amendment passes.

Additional Resources

The new rules are complex, and some vehicle manufacturers will find it challenging to adhere to the new standards—especially when it comes to mineral and battery sourcing. As the situation evolves, potential buyers can turn to several resources:

• The IRS provides an online summary of the legislation, where you can reference the latest details.
• The Department of Energy also offers an online guide highlighting which manufacturers currently meet the North American final assembly rules.  

Purchasing an electric vehicle is a new experience for many consumers. As you navigate which EVs have the best battery range or charging infrastructure, make this your road map for tax credits.