Technological advancements are paving their way more strongly than ever, and electric vehicles (EVs) are no exception. Numerous vehicle manufacturers have implemented development programs to roll out electric vehicles from their factories. Tesla started the creation of clean energy vehicles, and a large influx of automakers has followed. Although electric vehicles are relatively new, they have captured a material market share of buyers.
It is well known that, regardless of the manufacturer, this type of vehicle comes with a hefty price tag. Especially the most recent models, which have longer driving ranges and batteries that last longer. Moreover, along with hefty price tags come hefty taxes. Fortunately, there are federal tax credits that help offset some of the costs.
The electric vehicle credits (EVCs) can be divided into three separate categories, which dictate their related qualification requirements: Pre-Inflation Reduction Act, vehicles purchased between the Post-Inflation Reduction Act and the end of the 2022 year, and vehicles placed in service after December 31, 2022.
Let us start in chronological order with the rules established by the Pre-Inflation Act. As stated on the IRS website, "The Internal Revenue Code Section 30D provided a credit for Qualified Plug-in Electric Drive Motor Vehicles including passenger vehicles and light trucks. For vehicles acquired after December 31, 2009, and before August 16th, 2022, the credit is equal to $2,500 plus $417 for a vehicle which draws propulsion energy from a 5-kilowatt battery hour of capacity, plus an additional $417 for each kilowatt hour of battery of capacity thereafter," resulting in a total credit limit of up to $7,500. Furthermore, the vehicles acquired under this time frame must be for use or lease purposes and not for resale. The credits begin to phase out for a manufacturer’s vehicle when at least 200,000 units of qualifying vehicles of a particular model have been sold for use in the United States. Following is the link for the sales cap tracker of electric vehicles assembled in the U.S.: https://afdc.energy.gov/laws/electric-vehicles-for-tax-credit.
It should be noted that if a buyer enters a binding contract to purchase a new qualifying electric vehicle before August 16, 2022 but does not take possession of the vehicle until on or after August 16, 2022, the buyer may claim the EV credit under the previously described rules.
For vehicles purchased and delivered between August 17th and December 31st, 2022, all rules in the Pre-Inflation Act apply with an additional caveat: the electric vehicle needs to have a final assembly in North America to qualify for the tax credit. The build location of a vehicle can be found by referring to its Vehicle Identification Number (VIN) using the U.S. Department of Transportation VIN decoder.
Electric vehicles placed in service after December 31, 2022, have new guidelines to follow when qualifying for the credit, now known as the Clean Vehicle Credit. Beginning January 1, 2023, the new credit provisions will remove manufacturer sales caps and expand the scope of eligible vehicles to include both EVs and Fuel Cell Electric Vehicles (FCEVs). For example, a hydrogen fuel cell car or a plug-in hybrid vehicle could potentially qualify.
There are numerous new requirements as well as additional incentives, which will be covered next.
Vehicles that meet critical mineral requirements are eligible for a $3,750 tax credit, and vehicles that meet battery component requirements are eligible for a $3,750 tax credit. Vehicles meeting both mineral and battery component requirements are eligible for a total tax credit of up to $7,500. To be eligible for the $3,750 critical minerals portion of the tax credit, the percentage of the value of the batteries critical minerals that are extracted or processed in the United States need to meet certain percentages. For example, for 2023, 40% is the minimum percentage of minerals that need to be extracted or processed in the U.S. The percentages increase as the years go by. To be eligible for the $3,750 battery component portion of the tax credit, the percentage of the value of the battery’s components that are manufactured or assembled in the United States needs to meet certain percentages. For example, for 2023, 50% of the battery components will need to be manufactured or assembled in the U.S. The percentages increase as the years go by.
An additional restriction is the limit on thresholds for modified adjusted gross income (MAGI). Only individuals with MAGI below the following thresholds are eligible for the tax credit: $300,000 for married couples filing jointly, $225,000 for head-of-household filers, and $150,000 for single filers.
Another requirement under the new credit provisions is regarding manufacturer suggested retail prices (MSRP). Sedans with a retail price of more than $55,000 are not eligible, nor are vans, SUVs, or trucks over $80,000.
A new advantage is that a consumer can buy a used electric vehicle and qualify for a tax credit of either up to $4,000 or 30% of the vehicle's price, whichever is less (as long as the vehicle is not purchased for resale).
Lastly, beginning in 2024, consumers will have another option if they decide to wait to buy an electric vehicle until then. The law will allow a buyer to transfer their tax credit to the car dealership. In turn, the dealership would get an advance payment of the consumer’s tax credit from the federal government. This will result in the consumer receiving the full tax credit at the point of sale in the form of a discount on the price tag, regardless of whether they have a tax liability for the year or not.
From a tax point of view, the credit is beneficial for taxpayers with a federal tax liability of $7,500 or more. When having a tax liability of the aforementioned amount or more, this allows a taxpayer to take full advantage of the credit to help offset part of their tax liability. Nevertheless, it is important to keep in mind that this Clean Vehicle Credit is nonrefundable. For example, if the credit is $7,500 and the tax liability is $6,000, the taxpayer would be able to claim the $6,000 credit, but the remaining difference of $1,500 would not be issued in the form of a refund nor would it be carried over to the next year.