The Inflation Reduction Act of 2022 was notable for a number of reasons. One prominent aspect that’s received a lot of press is that it continues allowing for up to $7,500 in electric vehicle tax credits for purchasing a new EV— but with some new requirements. While these tax credits for electric vehicles are meant as an incentive to make the switch to electric-powered cars, there’s an ulterior motive: to drive EV auto construction in the United States.
In the long run, this move should help drive the adoption of electric vehicles — but there might be some hiccups in the near future.
As of Jan. 1, 2023, the Inflation Act legislation will require that for EVs to qualify, all of the following guidelines must be met:
- the EV must be assembled in North America
- the majority of battery components need to come from North America
- a percentage of “critical minerals” must be sourced in North America or via countries with U.S. free trade agreements
If you bought your vehicle before August 16 — when President Biden signed the act into law — all of the old rules apply. Electric vehicle qualifications for vehicles sold and taken possession of between August 16 and December 31, 2022, now demand that the final assembly of qualifying vehicles be completed in North America. Otherwise, all of the previous rules apply.
As you might guess, the new rules drastically reduce the amount and variety of EVs that will qualify for the several-thousand-dollar tax credit. Right now, for example, there are 27 eligible new 2022 vehicles listed on the U.S. Department of Energy’s Alternative Fuels Data Center. For 2023 new cars, there are five options. (Note: Vehicles that have met manufacturer caps are not eligible for the tax credit this year.)
While these new rules might help to drive EV manufacturing in the States, that’s going to limit rebated choices until auto manufacturers can move the production of cars to the U.S. and adhere to the necessary battery rules. Even those on the list might not necessarily be made in the U.S. The Department of Energy notes that since some models are manufactured in multiple locations, you’ll have to check the VIN number of the specific car you’re buying.
And when those new battery rules go into effect? According to the Alliance for Automotive Innovation, no current EV on the market will qualify when the new sourcing requirements go into effect.
What’s the solution, then, if you’re considering making the switch to an EV in the next 12 to 18 months? Buy a new EV before the year (and inventory) runs out.
If you’re wealthy, especially, there will be no better time than now through the end of the calendar year to buy an EV. Right now, no income requirements exist for people who can claim the EV credit. Beginning January 1, however, those credits will be capped at $150,000 income for a single filing taxpayer and $300,000 for joint filers.
2023 will also usher in limits on qualifying EV costs — $55,000 for new cars and $80,000 for pickup trucks, SUVs, and vans. This will be measured by MSRP, but the car’s final price is the applicable number. This means that adding a moonroof and heated seats might put you over the price limit when the year turns over.
While the Inflation Act’s restrictions will cut the number of vehicles the federal EV tax credit applies to, the bill dichotomously broadens the application of this financial motivator in significant ways:
- the federal EV tax credit will stay at $7,500
- the timeline to qualify for an EV tax credit extends to December 2032
- the 200,000 EV tax credit cap is eliminated, which makes some Tesla, GM and Toyota cars eligible again
- in 2024, the plan is to implement tax credit at the point of sale; This means a rebate right up front instead of at the end of the fiscal year
- also in 2024, a $4,000 rebate will be available for eligible vehicles with less than two years in use and sold for $25,000 or less by a licensed dealer
The list of qualifying EVs will likely shift in the coming months and years. In the meantime, if you’re in the market for a car that could save you thousands of dollars in gas and maintenance costs and you make too much to qualify under the new rules, the time to act is now. Do your research to make sure that the car you’re buying qualifies before throwing down a down payment.
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