What the new tax credit rule will mean if you’re buying an electric car

From the November 2022 issue of Vehicle and Driver.

As of August 15, about 30 new electric vehicles and 42 plug-in hybrids were eligible for the federal income tax credit. On August 16, those numbers drop to 8 and 10. Starting January 1, 2023, the number of eligible electric vehicles will increase to 11. These changes are a result of the Reductions Act. inflation that President Joe Biden signed into law on August 16.

Only one provision of the law took effect immediately, and that was a big one. Since that date, only vehicles assembled in the US, Canada, and Mexico are eligible for the $7,500 credit, eliminating nearly three-quarters of eligible vehicles.

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

Level change

The limit of 200,000 eligible EV units per automaker is lifted, making General Motors and Tesla vehicles eligible again. However, the new price cap on qualifying vehicles—$55,000 for cars, $80,000 for trucks and SUVs—removes the GMC Hummer and some Tesla vehicles (Models S and X, Model Figure 3 is higher decoration).

Another change is that the amount of the tax credit is independent of the battery size. If your EV or plug-in hybrid has a battery capacity of at least 7.0 kilowatt-hours, you can get the full $7500 subsidy. For the first time, used cars are eligible when purchased from a dealer. Now they get up to 30 percent credit, with a maximum of $4000. A used EV or plug-in hybrid must cost no more than $25,000 and be at least two years old.

One more perk starting in 2024: You can get credits for new cars on purchases instead of waiting until tax season. That means $7500 can be used as a down payment.

Locally sourced

Many changes related to electric vehicle production. In addition to the final vehicle assembly provision, half of the $7500 credit depends on at least 40% of the critical materials in the battery being extracted or processed in the United States or in countries with which we have an agreement. free trade agreement. North American recycled materials are also taken into account. Benchmarks gradually increase to 80% by 2027.

To promote domestic battery assembly, another $3750 is based on a minimum requirement of 50% of the value of battery components manufactured or assembled in North America. This number gradually increases to 100% by 2029.

Starting in 2024, if any battery component is manufactured in “a relevant foreign entity”, i.e. China, Iran, North Korea or Russia, that vehicle will be disqualified. The same rule will apply to the sourcing of critical materials by 2025.

Mo’ money, no credit

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

Overall, the credit terms for this new “clean vehicle” are a combination of industrial policy, social engineering and the promotion of electric vehicles. Incentivizing truck purchases by offering higher price ceilings makes little sense as trucks use more electricity, which is mainly supplied by power plants that generate CO2. But the domestic automakers are mainly heavy trucks, so this is another hit for them.

These rules, along with increasingly escalating battery provisions, will encourage more electric vehicles and assemblies in our automotive market. And battery regulations will help us develop local sources to power the upcoming waves of EVs. The promotion of mining permits and environmental impact statements could be even better, but they are not on the bill.

In the short term, the law is likely to reduce electric vehicle sales—at least until more manufacturers set up shop in North America. We’ll see how it plays out over the next few years.