Big changes are coming to the federal electric car tax credit with Congress passing the Cut Inflation Act, changes that could eventually make owning an electric vehicle easier, but initially more difficult to afford. The details are more complicated than ever, but can make a huge difference in the adoption of electric vehicles. Here’s what you need to know as President Joe Biden prepares to sign the new legislation.
First, the good news for EV buyers.
Credit extended to 2032
The new rules allow the federal tax credit of $7,500 back for a full battery or advanced plug-in hybrid through 2032. The groundbreaking ruling protects a program that has been in place since 2010 and has been targeted for elimination. by some politicians and at least one oil industry faction as a comforting gift to electric car makers and wealthier car buyers.
No more popularity penalty
The new rules remove a cap that nullifies the tax credit for any car brand once it has sold 200,000 units of eligible electrified personal vehicles. This “popularity penalty” has been decried by automakers like Tesla and GM who long ago sold more than 200,000 units and are now effectively playing the game at a $7,500 handicap. Ford and Toyota are also in the middle of their tax credit sunset phase. While there are economic and industry arguments on both sides, lifting the 200,000 unit cap is clearly a plus for car buyers who just want to choose from the most affordable cars.
When you choose an eligible electric vehicle, you’ll be able to apply the tax credit immediately at a car dealership by giving them your credit at sign-up, much like buyers often do with manufacturer’s rebates. This saves you from having to wait until tax day to benefit. You’ll still need to qualify for the credit at tax time and the IRS might recoup some or all of it if you don’t, but a little math on the back of the envelope should make that clear at the time of purchase.
So much for the good clear guys, now the new rules are getting tricky.
Purchase price limits
Forget getting paid to buy a Porsche Taycan or Tesla Model S: New rules only apply to cars that cost $55,000 or lessor SUVs and pickups that cost $80,000 or less. Automakers shouldn’t sleep on this one, as buyers above these prices are much less cost-conscious. But it should be noted that the average purchase price of a new vehicle in the United States skyrocketed to nearly $48,000 in May. I remember when rap lyrics bragged about driving a $50,000 car; now it could be a Toyota Sienna.
Your income limits
These limits on the cost of the car are largely rendered moot by new limits on the income level of the buyer. The EV tax credit is only available to purchasers whose adjusted adjusted gross income does not exceed $150,000 in the year of purchase, for a single filer; $225,000 for a head of household; or $300,000 if you are filing a joint return. These aren’t exactly poverty incomes, but they will exclude some of the most passionate EV evangelists in the wealthiest metros (PDF).
The next set of obstacles are blinding international trade policies.
Built in America, or somewhere we like
No matter the cost of the vehicle or your income, cars with batteries assembled or made from materials from “foreign entities of concern” will be in hot water. This sort of thing is well beyond my expertise, but the law firm White & Case says it will highlight countries specified in the Infrastructure Investment and Employment Act such as China, Russia, Iran and North Korea. The ban is stark in an auto industry that relies heavily on China, which may explain why it doesn’t come into effect until December 31, 2024.
This requirement is complemented by a new one that requires a qualifying electric car to be assembled in North America, which covers a large number of plants in Mexico, the United States and Canada. It’s not a totally strange concept as cars sold in the United States have long had window stickers that indicate where their major assemblies were assembled.
But wait, there’s more – much more
Doubling down on the previous two new rules governs the critical materials content of any qualified electric vehicle, 40% of which must come from US sources or countries with which the US has a free trade agreement. This percentage of supply increases to 50% in 2024, 60% in 2025, 70% in 2026 and 80% from 2027. Tesla is among the automakers that have recently actively entered into battery supply agreements wherever they can find them.
I love used cars and so does Uncle Sam
I’m a big fan of late-model used cars, so I’m happy with the tax credit of $4,000 or 30% of the purchase price on used electric vehicles that cost $25,000 or less. There are separate buyer income limits for used cars of $75,000 for a single filer, $112,500 for a family head and $150,000 for joint filers.
Not just pure electricity
The new program also encompasses plug-in hybrids as long as they have a battery capacity of 7 kWh or more, which is easy to exceed with vehicles like a 2022 Toyota RAV4 Prime PHEV that has an 18 kWh battery or a 2022 Ford Escape PHEV with a 14 kWh battery. battery. Be careful with an older plug-in hybrid, as they may have smaller batteries that don’t quite cut it. The IRS maintains a list of all plug-in vehicles that qualify for a federal tax credit.
Better than a deduction
And remember, these are tax credits that directly reduce the amount of tax you owe against your income for the year, not just any additional amount you owe at tax time. . This is quite different from the typical income tax deduction which allows you to reduce the amount of income you have to pay tax on. These electric vehicle tax credits are considered a much more powerful money-saving tool, but can only reduce your income tax for the year to zero; they cannot create a refund.
At the end of the line
This package will create a much friendlier EV buying landscape in a few years, but a virtual wasteland until then. Trade groups and industry analysts say 70% to 100% of electric vehicles currently sold in the United States will not qualify at first, a stark reality as we await a flood of credit applicability. tax towards the end of 2024.