What the new tax credit rules will mean if you’re shopping for an electric vehicle

Excerpt from the November 2022 issue of Car and driver.

On August 15, approximately 30 new electric vehicles and 42 plug-in hybrids were eligible for federal income tax credits. On August 16, those numbers dropped to eight and 10. Beginning January 1, 2023, the number of eligible electric vehicles will increase to 11. These changes are the result of the Cut Inflation Act that President Joe Biden enacted August 16.

Only one provision of the law came into effect immediately, and it is an important one. Since that date, only vehicles assembled in the United States, Canada and Mexico are eligible for the $7,500 credit, eliminating nearly three-quarters of qualifying vehicles.

Here’s what we’ll see in early 2023 and beyond:

Changing qualifications

The limit of 200,000 eligible electric vehicle units per automaker is lifted, making General Motors and Tesla vehicles eligible again. However, new price caps on eligible vehicles — $55,000 for cars, $80,000 for trucks and SUVs — eliminate the GMC Hummer and several Teslas (Models S and X, more upscale Model 3s).

Another change is that the amount of the tax credit does not depend on the size of the battery. If your electric or plug-in hybrid vehicle has a battery capacity of at least 7.0 kilowatt hours, you can get the full $7,500 allowance. For the first time, used vehicles are eligible when purchased from a dealership. They now get a credit of up to 30%, with a maximum of $4,000. The used electric or plug-in hybrid vehicle must not cost more than $25,000 and be at least two model years old.

Another benefit starts in 2024: you can get the new-vehicle credit on purchase rather than waiting for tax season. This means that the $7,500 can be used as a down payment.

locally sourced

Many changes concern the production of electric vehicles. In addition to the final vehicle assembly provision, half of the $7,500 credit is contingent upon mining or processing at least 40% of critical battery materials in the United States or other countries with which we have a free trade agreement. Materials recycled in North America also count. The baseline gradually increases to reach 80% in 2027.

To promote local assembly of batteries, the other $3,750 is based on a requirement that at least 50% of the value of battery components must be manufactured or assembled in North America. This bogey gradually intensifies to 100% in 2029.

From 2024, if battery components are manufactured in “a foreign entity of concern”, i.e. China, Iran, North Korea or Russia, the vehicle is disqualified. The same rule will apply for the supply of critical materials in 2025.

Mo’ Money, no credits

There is also an income cap for claiming the credit. For joint filers or surviving spouses, it’s $300,000; for a head of household, it’s $225,000; and for single and separate filers, the cap is $150,000. The adjusted gross income limits for used vehicle credits are half those for new cars.

Overall, these new “clean vehicle” credit provisions are a mixture of industrial policy, social engineering and the promotion of electric vehicles. Encouraging truck purchases by giving them a higher price cap makes little sense when trucks consume more electricity, mostly from CO2-generating power plants. But the domestic automakers are extremely heavy on trucks, so this is another concession for them.

These rules, along with increasing battery provisions, will further encourage the assembly of electric vehicles and parts in our automotive market. And battery regulations will help us develop local sources to supply the next waves of electric vehicles. Speeding up mining permits and environmental impact statements could do even more good, but they are missing from the bill.

In the short term, this law seems likely to reduce electric vehicle sales, at least until more manufacturers move into North America. We’ll see how it goes in a few years.

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About Valerie Wilson

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