What to Know About EV Tax Credits

In 2020, the Environmental Protection Agency (EPA) reported that the transportation system is the largest source of greenhouse gas (GHG) emissions, accounting for 27% of global emissions. Many countries are exploring opportunities to reduce these GHG emissions, one being the widespread adoption of electric vehicles (EVs).

More consumers, especially those who are climate-conscious, have or are considering purchasing an electric car. Various vehicle manufacturers compete in the electric car market, including Tesla, Chevrolet, BMW, Volkswagen and Hyundai. However, EV adoption rates in the U.S. have remained relatively low compared to other countries.

To boost adoption rates, the U.S. government has provided tax credits for EV buyers. However, the newly signed Inflation Reduction Act included changes to how these tax credits work. Continue reading to learn more about changes in EV tax credits and how these revisions impact current and potential EV buyers.

What are EV Tax Credits?

EV tax credits are federal incentives provided by the government to encourage consumers to buy EVs. These incentives typically increase EV adoption rates and support the transition to clean transportation. As gas prices rise, now might be the time to consider purchasing an EV for the long-term cost benefits associated with EVs.

Buyers must meet certain criteria to become eligible for the EV tax credit. Before the recent signing of the Inflation Reduction Act, the tax credit offered $7,500 for new EV buyers and a smaller credit for plug-in hybrid cars. However, eligible buyers could only receive the credit until the automaker reached a $200,000 limit.

In 2018, Tesla, a dominating force in the EV market, hit its $200,000 limit, lowering the credit amount by half every six months until it was eventually phased out. In a sense, these reduced tax credits put Tesla and other companies reaching the limit at a disadvantage over competitors. A potential EV buyer would much rather receive a credit of $7,500 compared to $3,750.

Understanding the New EV Tax Credit System

President Biden signed the Inflation Reduction Act into law on August 16, 2022. Along with more stringent requirements, a new EV tax credit system will replace the old one once the law goes into effect on January 1, 2023. 

One change brought about by the law is removing the $200,000 limit on vehicle manufacturers. It also creates several new tax credits restrictions, including EV purchases eligible for the credit, the price of EVs, limits on the buyer’s income and other rules applicable to EV batteries, supply chains and assembly.

The Inflation Reduction Act offers a $7,500 tax credit at the point of sale for new EV buyers and a $4,000 partial credit for first-time used EV buyers. Additionally, tax credits for used EV purchases cannot exceed 30% of the EV’s sale price.

An EV must be assembled in North America to be eligible and its battery components and battery minerals production must also be in North America.

Other rules for the new EV tax credit system include:

• Electric pickups and SUVs must have an MSRP of less than $80,000
• Electric vehicles, like sedans, must have an MSRP of less than $55,000
• If single, a buyer’s income must be lower than $150,000
• If the head of the household, a buyer’s income must be lower than $225,000
• If married, the couple’s income must be lower than $300,000
• Eligible EV purchases must be made before December 31, 2032 
  

Consumers should be aware of some other requirements and exceptions, which can be found on the tax credit information page on the U.S. Department of Energy’s (DOE’s) fuel economy website.

How Changes to EV Tax Credits Impact Consumers and Automakers

These sweeping changes to EV tax credits are bound to impact the EV market, including EV adoption rates, the number of EV registrations nationwide and where automakers operate. Companies building EVs and EV batteries might shift battery metals extraction, battery production and EV assembly back to North America, so their EVs are eligible.

Some EVs will only qualify for the tax credit for the rest of 2022. When the law goes into effect at the beginning of the new year, other EV makes and models will qualify. For example, Tesla models will be eligible for the tax credit starting in 2023, as long as the EVs meet all other requirements.

Consumers might feel more inclined to buy EVs if these tax credits are available. However, as you can see above, the new tax credit system is confusing, which could influence consumer purchasing decisions.

Some people in the market for a new vehicle might steer clear of EVs altogether to avoid any issues with the IRS. Anyone interested in more information should visit the following sites:

• Information on EV requirements and tax credits (on the IRS website)
• List of EVs eligible for the rest of 2022, into 2023 (on the DOE website)
• See if an EV is eligible for the tax credit by entering its VIN (on the NHTSA website)

EV Buyer Beware: New Tax Credit Requirements and Implications

Vehicle manufacturers and consumers will have to adjust to the changes in EV tax credit requirements caused by the Inflation Reduction Act’s passing. Aside from receiving a one-time federal tax credit, consumers reap several benefits of purchasing an EV. If you’re in the market for an EV, take the new changes to tax credits into account when selecting the type of vehicle you’d like to purchase.