Some of the biggest wins under the just-enacted climate and tax package will benefit consumers looking to buy an electric vehicle: a reconfigured $7,500 credit for new vehicles and a new $4,000 tax credit for a used one.
The Inflation Reduction Act signed by President Joe Biden Tuesday extends the existing $7,500 tax credit for EV vehicle purchases and eliminates a barrier under the old credit that phased out incentives for any automaker once it sold 200,000 electric vehicles. The new law ends the 200,000-unit-per-manufacturer sales cap beginning in 2023.
As restructured under the law, the credit could be good news for two domestic manufacturers that previously have burned through their quota:
However, with the legislation signed into law, those and other automakers are now bound by new domestic source requirements rendering only EVs that have final assembly in North America eligible for tax credits. The North America final assembly requirement “is the only change to the electric vehicle credit” to take effect immediately after Biden signed the Inflation Reduction Act into law, according to a Treasury Department fact sheet.
In addition, even US-made EVs will need to source their supplies of critical minerals such as lithium, cobalt and graphite from nations with which the US has a free trade agreement. Starting at the end of 2023 for batteries and the end of 2024 for minerals, no vehicle relying on Chinese sourcing for components or refining will be eligible for the credit.
The National Highway Traffic Safety Administration Tuesday published a web-based VIN decoder tool to guide consumers in using the credit by entering their prospective vehicle identification number into the site. The Department of Energy on Tuesday also released a list of qualifying vehicles.
New Credit Limits
The restructured EV credit also comes with new income limits and a cap on vehicle prices. The credit can only be used for car-based EVs costing $55,000 or less, which may be of limited benefit for many Tesla buyers, depending on the vehicle’s price. The credit cutoff for electric trucks, vans, and SUVs is higher, at $80,000.
Barring price changes by Tesla, only the most affordable Tesla models such as its Model 3 would be eligible for the $55,000 sedan credit. Tesla’s Model Y, which the company considers an SUV, is priced just under $70,000 in base trim and may also qualify.
Whether buyers can claim the credit also depends on their income. Single filers earning $150,000 or less in adjusted gross income, head of household filers earning $225,000, and joint filers at the $300,000 level can claim the $7,500 credit.
Buyers will continue to claim the EV tax credit on their annual tax filing, but beginning in 2024 will have the ability to transfer the value of the credit to dealers at the point of sale to immediately reap the benefits of the credit.
Auto manufacturers selling vehicles just above the $55,000 cutoff—including Cadillac, which lists its base price Lyriq EV near the $60,000 level—could move to offer models with fewer features to try to make their models eligible for the credit, said Steven Barber, a CPA with the Schneider Downs public accounting firm, which advises US auto dealers.
“The question could become, do you really need that navigation system, or parking sensor detectors” or other features if deleting them could make some versions eligible for the $7,500 credit, he said.
Used Vehicle Credit
The separate EV credit for used vehicles, which the Treasury Department said will be available beginning Jan. 1, 2023, will be either $4,000 or 30% of the vehicle cost, whichever is lower, and can only be applied to used vehicles costing $25,000 or less.
However, the credit for used EVs doesn’t hinge on the sourcing requirements the law applies to new EVs beginning Jan. 1.
As more electric vehicles enter the used market—and if inflation slows—the number of qualifying used vehicles should increase, according to the Zero Emission Transportation Association, which is pushing for 100% EV sales by 2030.
The income limits for the used vehicle credit are more stringent than those for new vehicle purchasers: $75,000 adjusted gross income for single filers, $112,500 for those filing as head of household, and $150,000 for joint filers.
— With assistance from Kaustuv Basu
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