All about the new tax credit for electric vehicles

A federal tax credit included in the Cut Inflation Act aims to expand access to electric vehicles (EVs), while introducing new limitations that could make eligibility difficult at this time.

The IRA, signed into law last week by President Joe Biden, is set to revamp the US energy landscape by making greener technologies more affordable for low-to-middle income consumers, along with other pricing reforms. medicines, the application of taxes, etc. . But despite its transformative potential, new requirements in the law that begin January 1, 2023 actually make most electric vehicles currently available ineligible for credit.

Either way, the automotive industry is making the transition to electric power. California regulators voted on Thursday to implement a plan to ban the sale of gas-powered cars by 2035, a move intended to divert business to electric vehicle makers. As the largest market for U.S. auto sales, California’s emissions and climate actions are widely influential, and a dozen other states are expected to follow suit, including Washington and the Massachusetts.

READ MORE: California on track to phase out gasoline vehicle sales by 2035

Here’s what electric vehicle researchers and a tax expert say you need to know about the requirements to claim the tax credit, which vehicles are eligible and more.

How is the new electric vehicle tax credit different from the current one?

The existing federal electric vehicle tax credit offers consumers a credit of $2,500 to $7,500 for vehicles with a battery capacity of at least 5 kilowatt hours, but begins to phase out after the purchase of the First 200,000 eligible electric vehicles from manufacturers.

The new law allows consumers to get up to $7,500 regardless of the number of cars sold, said Howard Gleckman, senior fellow at the Urban Institute’s Urban-Brookings Tax Policy Center.

While the original credit only applied to the purchase of new vehicles, the new credit also extends eligibility to used vehicles, said Nick Nigro, founder of Atlas Public Policy and expert in financing, policy and alternative fuel vehicle technology. Nigro said this is important because used vehicles make up the vast majority of vehicle purchases in the country.

Qualifying used vehicles are eligible for a credit of up to $4,000 under the Reduction of Inflation Act.

Additionally, the new credit is not a traditional deferred tax credit, said Gil Tal, director of the Plug-in Hybrid and Electric Vehicle Research Center at UC Davis. Instead, it’s called “cash on the hood,” or a discount that’s applied at the point of sale.

This means buyers won’t need to finance the full price of the car before getting the money back when they file their taxes. Instead, if the purchase qualifies for the tax credit, the car’s actual price at the dealership will be immediately lower by up to $7,500.

Tal added that the credit applies to all-electric vehicles, as well as plug-in hybrid cars, as long as the vehicle meets minimum battery capacity requirements.

Despite these expansions, the new tax credit also introduces new restrictions for consumers and manufacturers.

What are the price and salary restrictions?

There are two main restrictions on the consumer side: the price of the car and the income of the buyer.

For new vehicles, the Manufacturer’s Suggested Retail Price, or MSRP, must be less than $55,000 for sedans and less than $80,000 for vans, trucks and SUVs to qualify for the credit.

“If you want to buy a really expensive luxury car, you probably don’t need government help,” Tal said.

Similarly, the buyer must have a modified adjusted gross income less than or equal to $150,000 for single filers, $300,000 for married couples filing jointly and $225,000 for those filing as head of household.

Which electric vehicle manufacturers are eligible for the credit?

This is where the new electric vehicle tax credit runs into logistical hurdles. A provision in the bill limits eligibility for the tax credit to vehicles manufactured in North America and powered by batteries whose materials come from the United States or its free trade partners. Currently, many U.S. electric vehicle makers, including Tesla, rely on battery materials processed in China, a country classified by the bill as a “foreign entity of concern.” And any vehicle that was not assembled in the United States, Mexico or Canada is excluded.

While fewer Americans qualified for the original tax credit, fewer manufacturers are eligible for the new one, Nigro said.

In fact, Nigro and many others studying the issue confirmed earlier this month that manufacturing restrictions written into the bill mean nearly all electric vehicles sold today would not qualify for the credit.

However, since the bill’s passage, the US Department of Energy’s Alternative Fuels Data Center has compiled a list of vehicles that may qualify for final assembly in North America.

The list includes both manufacturers who have and have not reached a cap of 200,000 EV credits already used, so not all manufacturers listed will be eligible for the new credit until December 31, 2022. For example, Chevrolet – which has already hit the 200,000 cap — likely won’t qualify until next year, according to Consumer Reports.

So what will consumers really be able to do once the tax credit takes effect in January 2023?

Right now, there’s not much a consumer can actively do to make sure they get the tax credit, Nigro said.

“The ball is really in the industry’s court to deliver [eligible vehicles]based on the details of the proposed legislation,” he said.

Nigro explained that the time it takes electric vehicle manufacturers to mine minerals and manufacture batteries in various countries can take several years.

But this is a case of the government trying to accomplish three things at once, Gleckman said.

“He’s trying to encourage people to buy electric vehicles, he’s limiting the benefits to people earning less than a certain amount of money — he’s trying to be progressive in designing the tax code,” he said. he declared. “And he’s also trying to impose a ‘Made in America’ standard on cars.”

This last element – ensuring that the supply of materials for these vehicles is healthy, sustainable and beneficial to the country’s economy and security – is of crucial importance, according to Nigro.

“Aspects of the bill that seek to strengthen that security, to build that national capability, will benefit the industry in the long run,” he said. “It’s really a question of timing, and whether or not all the stars are going to align for the industry to be able to deliver the product within the timelines set out in this legislation.”

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