What New Tax Credit Rules Will Mean If You’re Shopping for an EV

From the November 2022 issue of Car and Driver.

On August 15, about 30 new EVs and 42 plug-in hybrids were eligible for federal income-tax credits. On August 16, those numbers fell to eight and 10. Starting January 1, 2023, the number of qualifying EVs will rise to 11. These changes are a result of the Inflation Reduction Act that President Joe Biden signed into law August 16.

Only one provision of the law took effect immediately, and it’s a big one. Since that date, only vehicles assembled in the U.S., Canada, and Mexico qualify for the $7500 credit, eliminating nearly three-quarters of eligible vehicles.

Here’s what we’ll see at the start of 2023 and beyond:

Shifting Qualifications

The limit of 200,000 units of qualifying EVs per automaker is lifted, making General Motors and Tesla vehicles eligible again. However, new price caps on qualifying vehicles—$55,000 for cars, $80,000 for trucks and SUVs—eliminate the GMC Hummer and several Teslas (Models S and X, higher-trim Model 3s).

Another change is that the amount of the tax credit does not depend on 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 stipend. For the first time, used vehicles are eligible when purchased from a dealer. They now get a credit of up to 30 percent, with a $4000 maximum. The pre-owned EV or plug-in hybrid must cost no more than $25,000 and be at least two model years old.

One more perk starts in 2024: You can get the credit for new vehicles at purchase rather than wait until tax season. That means the $7500 can serve as a down payment.

Locally Sourced

Many of the changes have to do with EV production. In addition to the provision about final vehicle assembly, half of the $7500 credit is contingent on at least 40 percent of the critical materials in the battery being extracted or processed in the U.S. or in countries with which we have a free-trade agreement. Materials recycled in North America also count. The benchmark gradually increases to 80 percent in 2027.

To promote local battery assembly, the other $3750 is based on a requirement that a minimum of 50 percent of the value of the battery components be manufactured or assembled in North America. This bogey escalates gradually to 100 percent in 2029.

Starting in 2024, if any battery components are manufactured in “a foreign entity of concern,” meaning China, Iran, North Korea, or Russia, then the vehicle is disqualified. The same rule will apply for sourcing of critical materials in 2025.

Mo’ Money, No Credits

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

Overall, these new “clean vehicle” credit provisions are a mixed bag of industrial policy, social engineering, and EV promotion. Encouraging truck purchases by giving them a higher price cap hardly makes sense when trucks use more electricity, sourced mostly from CO2-generating power plants. But the domestic automakers are overwhelmingly truck-heavy, so this is another sop to them.

These rules, along with the escalating battery provisions, will encourage more EV and parts assembly in our automotive market. And the battery regulations will help us develop local sources to supply the coming waves of EVs. Expediting mining permits and environmental- impact statements might do even more good, but they’re absent from the bill.

In the short term, this law seems likely to reduce EV sales—at least until more manufacturers set up shop in North America. We’ll see how it goes a few years out.