One element of the Inflation Reduction Act of 2022 that directly impacts consumers is the electric vehicle tax credit. Also known as the Clean Vehicle Credit, Section 30D of the Internal Revenue Code, extends and amends the tax credit available for current and future purchasers of qualifying electric vehicles.
While the intention of the Clean Vehicle Credit was to incentivize the purchase of electric vehicles and reduce the impact of climate change via a tax credit, there are a number of details that require a thorough understanding of the eligibility and limitations of the rules before buying an electric vehicle.
Current Credit for Electric Vehicle Purchased before December 31, 2022
To be eligible for the credit up to a maximum of $7,500 for an electric car delivered between August 16, 2022 through December 31, 2022, the final assembly of the electric vehicle must be in North America. However, because some manufacturers reached their cap of electric vehicle credits, the vehicles made by those manufacturers are no longer eligible for the credit. Before buying an electric vehicle in 2022, check the maker’s credit eligibility on the U.S. Department of Energy’s Alternative Fuels Data Center to ensure the vehicle qualifies for the credit.
Clean Vehicle Credit Caveats: Battery Minerals and Components
Starting in 2023, there will be no manufacturer sales threshold limits. However, in addition to the condition that the final assembly of the vehicle is in North America, the vehicle will also be subject to a critical minerals requirement and a battery component rule to qualify for the full $7,500 electric vehicle credit, as outlined below.
Under the critical mineral rule, 40% of the components of the battery’s critical minerals, such as lithium cobalt oxide, lithium manganese oxide, and lithium iron phosphate, must be extracted or processed in the United States or in a nation with which the U.S. has a free-trade agreement. This number increases by 10% each year until 2027, when it stabilizes at 80%.
Similarly, the battery component rule also requires a percentage of the battery’s components to be manufactured or assembled in North America, under a similarly graduated schedule, beginning with 50% in 2023 and capping out at 100% by 2029. Additionally, the vehicle’s battery must have a capacity of at least seven kilowatt-hours.
Both factors must be met for the full tax credit; if only one factor is met, the credit is capped at $3,750.
The Clean Vehicle Credit also includes credits for used electric vehicles. The buyer of a used electric vehicle may be eligible for a smaller tax credit, equal to the lesser of $4,000 or 30% of the sales price of the vehicle. To qualify for the credit, the used electric vehicle must be at least two years old and purchased from a dealer. The buyer’s modified adjusted gross income cannot exceed $150,000 for joint filers, $112,500 for heads of household, and $75,000 for single filers.
Clean Vehicle Credit Limits: Price and Income
The Inflation Reduction Act also enacts caps on the manufacturer’s suggested retail price on electric cars. For 2023, the price of a qualifying vehicle cannot exceed $55,000 for sedans and $80,000 for vans, SUVs, and pickup trucks.
A taxpayer’s income also plays into eligibility for the tax credit. The electric vehicle tax credit is limited based on the taxpayer’s modified adjusted gross income which must be $300,000 or less for joint return filers, $225,000 for heads of household, and $150,000 for single filers.
The Future of EVs: Lower Prices?
Beginning in 2024 an electric vehicle buyer will have the option to monetize the credit by transferring it to the dealer at the time of purchase, thus reducing the amount the buyer pays for the car. This allows buyers to take immediate advantage of the tax credit instead of waiting for the next year when they file their tax return.
An electric vehicle may be an attractive option for a number of reasons. However, before you plug in and drive off, check with your tax advisor to understand how you may be eligible for the Clean Energy Credit, and if you should alter your plans to purchase a clean car based on current and future tax rules.
LGA specializes in helping individuals and families with their tax needs so clients can reduce or defer their current and future taxes and maximize available cash for long-range financial strategies.
Contact me today if you have questions about the Clean Vehicle Credit, other provisions of the Inflation Reduction Act that may affect you, or any other individual and family tax matters.
Madalina is a senior tax manager in the Family, Estate and Fiduciary group specializing in tax compliance and planning for individuals, trusts, estates and closely held businesses and their owners. With over 10 years of experience working with high-net-worth clients, Madalina has technical expertise with a variety of specialized projects, including ISO planning, Roth conversions, gifting, and philanthropic planning strategies. She works closely with her clients, their financial planners and estate attorneys to ensure that their personal goals are met in a tax efficient manner.