The New EV Tax Credit: Can You Benefit from It?

By Andrew J. Walker, CFP®

Financial Advisor

On August 16th, 2022, President Biden signed into law H.R. 5376, otherwise known as the Inflation Reduction Act of 2022.

This legislation will have meaningful implications for energy policy and consumers for years to come. The stipulations in the act related to the renewal and expansion of the electric vehicle (EV) tax credit are particularly complex. Below, we address some common questions consumers may have.

EV Tax Credit FAQs

What is the EV tax credit?

The EV tax credit under the Inflation Reduction Act allows for a dollar-for-dollar reduction in the income tax you would otherwise owe when you file your tax return. Starting in 2024, the tax credit amount will be available at point of sale.

What is the maximum potential value of the EV tax credit?

The Inflation Reduction Act extends the previously available tax credit of up to $7,500 for the purchase of new EVs through 2032. It also introduces a $4,000 tax credit (or 30% of the sales price, whichever is less) for the purchase of used EVs.

Do all EVs qualify for the tax credit?

The short answer is “no”. Starting in 2023, there are several stipulations about the vehicle itself that could limit or even completely negate the tax credit available to you:

 

Price/MSRP: The EV tax credit imposes price caps on vehicle eligibility. These caps may limit your options of both EV manufacturer and model1:

  • New sedans must have a manufacturer’s suggested retail price (MSRP) of $55,000 or less to qualify.
  • New SUVs, vans, and pickup trucks must have an MSRP of $80,000 or less.
  • Used vehicles (defined as at least two years old and purchased from a dealer) must have an MSRP of $25,000 or less.

Assembly Location: The EV (including the battery) must now have its final assembly and manufacturing location in North America to qualify for the tax credit. The minimum required percentage of assembly done in North America will be phased in over time, according to the following schedule2:

  • 2023: 50%
  • 2024: 60%
  • 2025: 70%
  • 2026: 80%
  • 2027: 90%
  • 2028 to 2032: 100%

Component Sourcing: The availability of the EV tax credit also depends on whether the manufacturer sources battery minerals from countries with whom the U.S. has free trade agreements. The minimum required percentage of materials that must be sourced from approved countries will also be phased in according to the following schedule3 4:

  • 2023: 40%
  • 2024: 50%
  • 2025: 60%
  • 2026: 70%
  • 2027 to 2032: 80%

Starting in 2024, new EVs manufactured with battery minerals or components sourced from “foreign entities of concern” (which today would likely include China and Russia) will not qualify at all for an EV tax credit.5 As a result, manufacturers may find it difficult to comply; China currently refines about 60% of the lithium and 77% of battery cell capacity worldwide.6

Note: this restriction will not apply to used EVs.7

How will you know whether a particular EV qualifies for the tax credit? The best source of information will be your local dealership who will most likely be promoting the EVs in their inventory that meet the criteria. Alternatively, the U.S. Department of Energy website lists the currently approved EVs with final assembly in North America.

 

Does My Income Level Qualify Me for the EV Tax Credit?

Income level may also be a limiting factor to benefit from this tax credit. Beginning in 2023 (and depending on whether you are purchasing a new or used EV), your modified adjusted gross income (MAGI) cannot exceed the following amounts to qualify8:

New Cars

Tax-filing status Modified adjusted gross income
Single $150,000
Head of household $225,000
Married, filing jointly $300,000
Married, filing separately $150,000

 

Used Cars

Tax-filing status Modified adjusted gross income
Single $75,000
Head of household $112,500
Married, filing jointly $150,000
Married, filing separately $75,000

Plan Ahead for an EV Purchase

As you can see, there are many stipulations in this legislation that will determine whether you might benefit from a tax credit when purchasing an electric vehicle. Purchasing an EV could possibly impact your financial plan as well. Modera is here to help you navigate through this decision and assist you in determining what might work best for your situation. For more information, please get in touch with your Modera advisory team.

1 https://www.consumerreports.org/cars/hybrids-evs/electric-vehicles-that-qualify-for-new-ev-tax-credit-a9310530660/

2 https://www.nerdwallet.com/article/taxes/ev-tax-credit-electric-vehicle-tax-credit

3 https://afdc.energy.gov/laws/409

4 https://www.dlapiper.com/en/us/insights/publications/2022/08/inflation-reduction-act-seeks-to-jumpstart-electric-vehicle-market/#:~:text=To%20qualify%20for%20the%20second,to%20100%20percent%20after%202028

5 https://www.nerdwallet.com/article/taxes/ev-tax-credit-electric-vehicle-tax-credit

6 https://www.barrons.com/articles/china-ev-batteries-lithium-mining-51652889888

7 https://www.investors.com/news/ev-tax-credits-big-changes-for-electric-vehicle-subsidies-what-you-need-to-know/

8 https://www.consumerreports.org/cars/hybrids-evs/electric-vehicles-that-qualify-for-new-ev-tax-credit-a931053066

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