Most consumers know there are various electric vehicle tax credits available if they buy a new electric vehicle. The original credit, officially known as the “Qualified Plug-in Electric Drive Motor Vehicle Credit”, was instituted over a decade ago. It created a tax credit amount between $2,500 and $7,500 based on a specific qualifying vehicle’s battery capacity. There was also a 200,000-unit limit to how many zero-emissions electric cars a single manufacturer could sell before the credit would phase out and eventually be eliminated. Two automakers, General Motors and Tesla, had already hit this limit in recent years, with a few more getting very close in 2022

But the passage of the Inflation Reduction Act of 2022 has altered the existing rules for the federal tax credit, removing the 200,000 limit, extending the up-to-$7,500 credit through 2032…but also adding a new set of eligibility requirements based on the final assembly location of the vehicle and its battery components. New vehicle pricing and adjusted gross income requirements have also been enacted. The new rules are a reaction to China’s dominance in the EV space, a dominance President Biden and the U.S. Department of Energy would like to reverse by encouraging the production of battery electric vehicles (BEVs) and battery components in North America.

The Inflation Reduction Act – Pros and Cons

Encouraging the American production of clean vehicles, including plug-in electric vehicles (EVs), plug-in hybrid electric vehicles (PHEVs), and hydrogen fuel cell electric vehicles (FCEVs), is commendable. However, the change in eligibility requirements could actually limit new vehicle tax credits more than the outgoing legislation. Let’s take a closer look at where this new legislation helps, and hurts, your chances at seeing a rebate.

Pros:

No 200,000 Vehicle Limit per Manufacturer – Which means brands like Cadillac, Chevrolet and Tesla will be back in the running for a $7,500 tax break, along with every other automaker selling EVs, PHEVs (with a battery of 7 kilowatt hours or larger), or FCEVs. Income and MSRP Restrictions – The previous legislation had no limit on household income or eligible vehicle pricing, which meant a lot of taxpayer money was spent helping millionaires get a $7,500 price break on their $100,000-plus Tesla. Starting on January 1st, 2023, the new legislation puts an MSRP limit of $80,000 on electric vans, SUVs, and pickup trucks, and a $55,000 MSRP limit on electric sedans, coupes, wagons, and convertibles. The IRS also puts a $125,000 annual income limit on single tax filers, a $250,000 limit on head-of-household filers, and a $300,000 limit on joint filers. Plug-In Hybrid Credit – It’s easy to get caught up in the electric vehicle fervor, but keep in mind these tax credits apply for plug-in hybrid vehicles too. If you aren’t ready to make the leap to a pure EV, consider a plug-in hybrid as an intermediate step that can still benefit from the latest vehicle tax credits. Example vehicles include the BMW 330e, Chrysler Pacifica PHEV, Ford Escape PHEV and Volvo S60 PHEV. Used EV Tax Credit – For the first time ever, car buyers seeking a lower cost of entry into EV ownership don’t have to choose from pricier current or new model year vehicles. A tax credit on used vehicles, worth either $4,000 or 30 percent of the used EV’s sales price (whichever is lower) will be available on used models (model year at least two calendar years past) costing less than $25,000 and purchased from a dealer. This credit is only available to single filers below $75,000, head-of-household filers below $112,500, and joint filers of $150,000. Commercial Tax Credit – If you happen to be a business owner looking to go electric the new bill provides up to $7,500 for electric vehicles with a gross vehicle weight rating (GVWR) under 14,000 pounds and up to $40,000 for vehicles with a GVWR above 14,000 pounds. The rebate is based on either 30 percent of the total vehicle cost, or the incremental cost of a commercial EV over the cost of an equivalent non-EV vehicle. For instance, the Ford F-150 Lightning has a starting MSRP of $46,974, but you can buy an equivalent crew-cab F-150 with an internal combustion engine for around $50,000. There’s no incremental cost to buying the Lightning, so a commercial buyer could only benefit from 30 percent of the truck’s $46,974 price (around $15,680). Point of Sale Price Reduction – Starting on January 1st, 2024, buyers can transfer their credit to the selling dealer, essentially providing an immediate reduction in the price of an EV during purchase versus waiting to receive the benefit as part of their next tax filing.

Cons:

Final Assembly Must be in North America – Starting on August 17th, 2022, only plug-in electric vehicles assembled in North America are eligible for tax credits. As of this writing, that includes 26 EVs from model year 2022, but only 18 EVs from model year 2023. A vehicle’s VIN (vehicle identification number) will be used to determine where a potential candidate was built. Popular EVs like the BMW 330e, Chevrolet Bolt, Nissan Leaf, and all Teslas have already been approved for model year 2023, and we’d expect other models assembled in Canada, Mexico, or the U.S. to be approved soon, including the Audi Q5 and Ford Mustang Mach E. However… Critical Mineral and Battery Component Requirements – Even if an electric vehicle is assembled in North America it will need to meet increasingly stringent battery requirements over the coming 5 years. Starting in 2023 an EV’s battery will need 40 percent of its critical minerals value to have been extracted or processed in the U.S. or a U.S. free-trade agreement partner to receive up to $3,750 in tax credits. This percentage will increase 10 percent a year, up to 80% of the battery’s critical mineral value in 2027 and beyond. Additionally, starting in 2023, 50 percent of the value of an EV battery’s components must be assembled in the U.S., increasing 10 percent a year until it reaches 100 percent in 2029.

Vehicles Eligible for the EV Tax Credit

The following electric vehicles and plug-in hybrid electric vehicles are eligible for the federal EV tax credit.

For a full list of vehicles and the amount of money they qualify for, refer to FuelEconomy.gov.

The newest bill’s final assembly and critical mineral battery requirements are meant to shift the production of electric vehicles back toward the U.S. and its allies, and away from foreign entities of concern, including China. Given the supply chain issues we’ve experienced over the past 2 years this is a wise long-term goal. However, the time and resources needed to transplant the electric vehicle alternative fuels industry from the Asia Pacific region to the U.S are substantial.

Foreign automakers like Honda, Hyundai, Kia, Mercedes-Benz, and Toyota have already committed to high-volume North American vehicle production in recent decades. There’s every reason to believe they can relatively quickly do the same for their electric vehicle fleets to meet the final assembly requirement for successful new models not yet produced here, like the Hyundai Ioniq 5. Several automakers with smaller U.S. production capacity, including BMW, Volkswagen, and Volvo, also continue to expand their U.S. presence.

But battery production is an entirely different process compared to vehicle assembly. It involves significant investments in land assessment/exploration, permit applications, approval, mining, extraction, refining, etc. You can imagine the processes and time frame involved in, for instance, setting up a lithium mine in California. Investing in, and establishing, those capabilities will take several years at least, and could easily prove a limiting factor on how many new EVs can fully qualify for the latest tax credits under the current legislation.

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