How Does the new Electric Vehicle Tax Credit for 2022 Work?
This bill has far-reaching implications – from renewable energy to healthcare, but one of the most talked about is the incentives for electric vehicles. People looking to switch to EVs can take advantage of the redesigned Clean Vehicle Tax Credit, or the brand new tax credit for used Electric Vehicles.
The recent Inflation Reduction Act will help the United States into a sustainable future, incentivizing things like clean energy, electric vehicles (EV), and sustainable infrastructure. One of the most talked about incentives are those for electric vehicles. People looking to switch to EVs can take advantage of the re-designed Clean Vehicle Tax Credit, but not all of the changes for EVs are going to benefit car buyers right away. It might take a bit for the electric vehicle industry to meet some rigorous requirements.
The Federal Electric Vehicle (EV) Tax Credit at a glance:
- The Inflation Reduction Act extends the $7,500 federal electric vehicle tax credit for new cars until 2033.
- Electric Vehicles purchased between now and the start of 2023 will follow the criteria of the EV tax credit prior to the signing of the Inflation Reduction Act, but must meet an additional requirement of being assembled in North America.
- Car buyers can get a credit of up to $4,000 for used electric vehicles that sell for $25,000 or less.
- Cars and batteries must be assembled within the United States, and the minerals included within the battery must be mined in the U.S. or countries with free trade agreements.
Before the Inflation Reduction Act was signed, the federal EV tax credit was based on the size of the car’s battery, in kilowatt0hours, for a total incentive of up to $7,500. There was also a limit on what cars qualify, based on the number of EVs sold by the car manufacturer – only the first 200,000 EVs sold per manufacturer could take advantage of the tax credit. This was incredibly limited.
For electric vehicles purchased after the signing of the IRA, but before the start of 2023, these same rules still apply. However, there is now an additional requirement. EV’s purchased between August 16th, 2022, and December 31st, 2022, must be assembled in North America. This is in addition to the existing eligibility criteria. Right now, some vehicles meet the current EV tax credit requirements and the assembly criteria. These are the BMW 330e, xDrive45e, certain Ford EV models, the Nissan Leaf, Mercedes EQ5, along with any pre-orders for the Lucid EV.
How does the new eV Tax Credit Work?
The new version of the EV tax credit applies to electric cars put in service after December 31, 2022. The credit can be applied to your federal income taxes or be transferred to the dealer upfront to reduce the cost of an electric vehicle. You can potentially earn an EV tax credit up to $7,500, but it is limited to how much you owe in taxes. Any additional value of the tax credit cannot carry over to the next year.
A majority of your car battery minerals must be sourced from and assembled within North America to get the total $7,500 credit. These guidelines are still being developed, and the metrics will be more challenging to hit year over year, as the bulk of minerals and metals for batteries are mined in countries that don’t have free trade agreements with the U.S. This makes it a bit hard to predict what cars qualify for the tax credit or that will in the future.
How to Qualify for the Electric Vehicle Tax Credit
To ensure that this credit is helping those that need it the most, there is an income requirement. For a single tax filer, you can not claim the Electric Vehicle credit if your income is above $150,000. Couples who file jointly have a cap of $300,000. For someone filing as head of household, who can claim dependents and earns over half of the household income, earnings have to be less than $225,000 to qualify.
The credit is meant to ease the burden of buying an electric vehicle for everyday Americans. Because of this, the IRA put an MSRP limit to prevent the tax credit from being used to buy luxury electric vehicles, where the price wasn’t likely to be a deciding factor in the purchase. This means that the price of the car also determines if you can claim the tax credit. For SUVs, Vans, and Pickup Trucks, MSRP cannot exceed $80,000. For any other vehicle, MSRP cannot exceed $55,000. However, these additional requirements for luxury vehicles do not go into effect until 2023. So if you are looking to purchase a luxury EV, 2022 would be a good time to do it. This is also the case for those who exceed the income limit for the 2023 EV tax credit.