Thinking about buying an electric or fuel cell vehicle? You might be excited by the new tax credits that are part of the Inflation Reduction Act…but you’ll want to read the fine print.
Broad stroke of the bill says a tax credit of up to $7,500 is available for purchase of a new electric or fuel cell vehicle. Some plug-in hybrids also qualify.
BUT, THAT’S NOT ALL…
If the vehicle is an SUV, pickup truck, or van, the $7,500 applies if the vehicle costs less than $80,000. For sedans, hatchbacks, wagons, and other vehicles, the credit cuts off at a purchase price of $55,000. In short, the credit applies to more affordable EVs.
BUT WAIT, THERE’S MORE…
The true amount of the credit depends on a complex set of calculations based on where the vehicles are assembled and where the materials that make up their batteries are sourced. The requirements continue to get stricter each year through 2026. While the specifics of all requirements have yet to be finalized, it is clear that vehicles must be assembled in North America. Additionally, vehicles cannot have components from “foreign entities of concern,” including China and Russia. This includes batteries and battery minerals.
FURTHERMORE…
Income guidelines apply. Households where taxpayers are Married Filing Jointly will need an adjusted gross income of $300,000 or less to qualify for the credit. Head of Household filers can make up to $225,000. Individual filers are limited to a maximum income of $150,000 to qualify for the credit.
AND DIFFERENT RULES APPLY TO USED VEHICLES…
Those who purchase a used EV from a dealership (must be purchased at a dealership) may qualify for a $4,000 tax credit. This is the first time a credit is available for the purchase of a used EV. The credit is $4,000 or 30% of the sale price of the vehicle – whichever is less.
Income thresholds are also lower. Households where taxpayers are Married Filing Jointly will need an adjusted gross income of $150,000 or less to qualify for the credit. Head of Household filers can make up to $112,500. Individual filers are limited to a maximum income of $75,000 to qualify for the credit.
OTHER THINGS WORTH MENTIONING…
The bill does away with the current limit on number of vehicles an automaker can sell that are eligible for the credit. Until now, buyers of electric cars and plug-in hybrids could get up to a $7,500 federal tax credit as long as the manufacturer has sold fewer than 200,000 qualifying vehicles. The credit phased out at 200,000. Because of this, some of the well-known EV companies have not qualified for a federal tax credit for several years. These manufactures may again qualify for a credit based on the other criteria already outlined.
Additionally, most of the proposed rules go into effect for cars put into service after December 31, 2022 and are valid through 2032. The “built in North America” requirement, however, goes into effect as soon as the law passes. The $4,000 tax credit on used EVs will be for those put into service after December 31, 2023. Take away from this is to be sure to read the timeline for your particular purchase to ensure you get your qualified tax credit. Be sure to contact a tax advisor for your unique situation.