Most new electric vehicles on sale today are unlikely to qualify for up to $7,500 in federal EV tax credits after Dec. 31 under revisions made in the comprehensive climate, health care and tax bill — the Inflation Reduction Act of 2022 — signed today by President Joe Biden. The overhaul of the program , however, includes the first-ever credit for buying a used EV, worth up to $4,000. Until Dec. 31, the old EV credit rules will apply for vehicles currently eligible.
Those are the highlights for shoppers considering or in the market for EVs. But the devil will be in the details: What has been a fairly easy subsidy program to understand will become much more complicated, with more strings attached to the money for cars and buyers. The new law’s broad intentions now must be translated by federal agencies into specific regulations to implement the revised EV tax credit and sort out complications; details and timetables could change in the process. Cars.com will continue coverage as details are finalized.
Trading Short-Term Pain for Long-Term Gain
Limiting the number of EVs qualifying for a tax break might seem odd for legislation that aims to encourage EV adoption. That’s particularly true with EV sales growing despite inventory shortages: Automotive News reports new EV registrations rose 60.4% in the first quarter of 2022 from the same time a year earlier, climbing to 5.11% of overall registrations, according to data firm Experian.
But the legislation also has bigger — and, for now, conflicting — EV goals. It aims to promote the production of EVs in North America and shift supply chain partnerships for them to friendly countries with which the U.S. has free-trade agreements. That would cut some reliance on China, though the tilt also excludes Japan, the European Union and other friendlier but not free-trade partners. The legislation, which runs through 2032, also aims to promote less expensive EVs for less well-off buyers by attaching new limits for the tax credit based on vehicle prices and buyer incomes. The short-term result: About 70% of the 72 EV models currently on sale in the U.S. will be ineligible for a tax credit when the law takes effect, according to John Bozzella, CEO of the Alliance for Automotive Innovation, a major automaker trade group.
To help with the long-term outlook, however, other sections of the bill include several big buckets of money meant to support domestic battery and vehicle production projects as well as changes in sourcing of critical materials. It also creates tax credits for electric commercial trucks and buses of up to $40,000.
Changes for Buyers
While that’s the high-level view, here are changes and revisions to the EV credit at the dealer-lot level that will start kicking in for 2023.
For starters, to get the revised EV credit, the vehicle must be assembled in North America (the final assembly location is on the window sticker). That rules out a lot of current EVs right away.
No Credit for Toys for the 1%
The legislation sets vehicle price and buyer income limits for EV credits. The maximum price for new pickups, vans and SUVs is $80,000; for cars, wagons and hatchbacks, the cap is $55,000 (watch for a fight over how the government classifies specific vehicles for credit purposes). Buyers, meanwhile, can have a maximum household income of $300,000 for joint filers, $225,000 for heads of households and $150,000 for individuals. Neither the price nor income limits likely seem all that strict for most of us, but it addresses criticism of a lack of limits for the current credit.
Used-Car Buyers Get a Break
Used EVs will be eligible for a tax credit for the first time to help more regular folks join in on the fun. The credit ranges up to $4,000 or 30% of the sale price, whichever is lower. The vehicle must be bought from a dealer, be at least two model years old and have a sale price capped at $25,000. Buyers can have income of up to $150,000 for a joint return, $112,000 for heads of household and $75,000 for individuals. Given used EV prices and limited inventory, it might be a while before this has an impact, but used vehicles account for a majority of car sales. You can check out used EVs for sale on Cars.com.
No Waiting for the Money
When the new system is fully in place, you’ll be able to redeem the credit at the vehicle purchase rather than waiting until you file your taxes to claim it. Be warned that you collect the credit before your income for that year is final, so if you’re lucky enough to beat the salary cap, the IRS might want the money back.
No Penalty for Selling Lots of EVs
The old limit of 200,000 EVs and plug-in hybrids sold per automaker is lifted. That means Tesla and GM will again be eligible in 2023. Toyota, which was losing the credit, and Ford and Nissan, which could have been next, no longer will have that concern.
Battery Will Power the Credit
Qualification for the full $7,500 credit eventually will be split into two equal parts, both based on new requirements for the vehicle’s battery. A vehicle could qualify for one, both or none. A credit of $3,750 will be based on the value share of key materials (such as lithium, nickel and cobalt) in the battery that were mined or processed by a U.S. free-trade partner or were obtained through electronics recycling in North America. The other $3,750 will be based on the value of the battery’s components made or assembled in North America. The required percentage minimums for each half would ratchet up over the years. Separately, after 2023, no battery components from China would be allowed.
This has been a particularly contentious area for the new credit and is the least immediately clear. Determining regulations to calculate the content value in these complex assemblies will be complicated; they could be open to interpretation and may not be in place by the end of next year. U.S. Sen. Debbie Stabenow, D-Mich., told the Associated Press last week that she hopes the Biden Administration will offer the tax credit widely next year while it works on the battery rules.
Current Rules Until New Year’s Eve
The current Internal Revenue Code Section 30D rules governing the tax credit for EVs and PHEVs based on battery size and sales apply through the end of 2022. Given EV order backlogs and wait times, there is a provision in the new law to allow “written binding contracts” under the old program for a vehicle still to be delivered. But IRS rules still to come will determine what it takes to qualify. The new federal rules will not, however, affect the various state and local subsidies that are available to EV buyers.
What’s a Shopper to Do?
The only tax-credit reason to rush out now is if you’re ready to buy and the vehicle you want is available. Keep in mind that the tax credit is not “refundable,” which in tax parlance means if you only owe the feds $5,500 when you file your taxes, that’s all you get — it’s use it or lose it. Also keep in mind that if you pay a “market adjustment” over the sticker price, you gained nothing.
But if you don’t need a car now, there’s no reason to hurry and lots of reasons to wait. For starters, if you want a used EV, there is no credit until next year, and ditto if you want a Tesla or GM vehicle. And as noted, details of the new law remain in flux.
Meanwhile, automakers will be working hard to shore up their assembly and supply plans to maximize consumer tax credit eligibility for new vehicles and to qualify for some of the newly available industry subsidies; they’ll also be working to offer vehicle variants that meet the price caps. Finally, a gaggle of all-new EVs and PHEVs are in the pipeline for the next few years that could be winners, whether you get a tax credit or not.