What the New Electric Vehicle Tax Credits Mean for You
President Biden just recently signed into law the Inflation Reduction Act (IRA), representing the largest federal investment to fight climate change in United States history. The sweeping legislation includes a number of incentives benefitting individuals who want to make more climate-friendly choices like purchasing high-efficiency appliances, installing rooftop solar panels, or purchasing an electric car.
Transportation is the country’s largest source of GHG emissions, and electric vehicles (EVs) are the fastest way to reverse that trend. The IRA’s new EV incentives can accelerate the shift away from dirty combustion engines while unlocking consumer savings, onshoring manufacturing jobs, securing America’s clean energy supply chain, and cleaning the air in our most pollution-burdened communities.
Prior to the passage of the IRA, the U.S. EV market faced significant challenges. Not only were long-standing tax credits set to expire, but large EV automakers like Tesla and GM had already reached the 200,000-vehicle sales cap, making their EVs ineligible for the credit. Incentives didn’t exist for commercial vehicles or used EVs and the credit couldn’t be applied to the point of purchase, which meant only a small fraction of consumers were benefitting.
Supply chain issues have not only caused a strain on vehicle availability but have caused longer wait times. Furthermore, there have been serious national security concerns around the foreign control of the EV supply chain and critical minerals, especially since most EV models are manufactured overseas.
The IRA means big changes for consumers, the auto industry, and the economy by addressing the US EV market’s shortcomings and creating a more sustainable, equitable, and secure transportation future. Plus, the IRA’s 10-year time span creates stability that the US EV market has lacked in the past. Ultimately, the IRA will help millions of Americans benefit from clean transportation, bolster national security, increase economic competitiveness and create domestic jobs for decades.
A More Domestic EV Supply Chain
The moment President Biden signed the IRA, a significant change to the long-standing EV incentive became effective. Now, only passenger vehicles made in North America qualify for the $7,500 federal EV tax incentive, leaving about 30 models eligible. Even though the manufacturer’s cap has already been reached by 10 of those models, the IRA will raise it as of January 1, 2023.
With revised material and vehicle component regulations, the IRA also addresses the domestic manufacturing gap for batteries and essential minerals. Instead of securing our continued reliance on outsourced mining and manufacturing for another ten years, the IRA requires fulfillment of two new conditions (each worth $3,750) necessary to qualify for the full $7,500 incentive.
Materials. Critical minerals used in EV batteries must be harvested, processed, or recycled in North America or in nations with whom the United States has free trade agreements, with the percentage rising from 40% in 2023 to 80% in 2026 by an annual increase of 10%. Beginning in 2025, vehicles won’t be eligible for the tax credit if a “foreign entity of concern,” which includes precisely named nations and organizations owned by, controlled by, or subject to the jurisdiction of such nations, mined, processed, or recycled the battery’s essential materials.
Components. Components for an EV battery must be produced or built in North America—50% starting in 2023, rising by 10% annually, and reaching 100% in 2028. Beginning in 2024, vehicles will no longer be eligible if the battery components were produced or assembled by a foreign entity of concern.
Creating a More Equitable and Sustainable EV Market
The implementation of IRA requirements will foster long-term equitable EV growth and foster the development of a competitive and safe domestic EV industry, enabling more Americans to benefit. EVs are less expensive to own than gas-powered vehicles, but until recently many lower or middle-class households found it difficult to afford an EV that could save them hundreds each year at the gas pump. The balanced incentive structure of the IRA reduces these up-front expenses, making EVs more accessible and less expensive.
First, it eliminates the arbitrary limit of 200,000 vehicles per manufacturer. Lifting the cap will allow many popular and reasonably priced EVs to once again qualify for the tax credit, attracting new customers and boosting sales for U.S. manufacturers who had previously reached their maximum.
Second, starting in 2024, the law will permit car customers to transfer their credit to dealers at the point of sale. Point-of-sale incentives make EVs the more attractive choice by lowering the upfront purchase price, affecting the amount you owe, and lowering loan expenses. Energy Innovation modeling demonstrates that this new incentive feature will reduce the price of the majority of new EVs straight out of the gate, giving American-made mid-range vehicles an advantage.
Smart EV incentive design also makes sure that taxpayer funds aren’t used to subsidize luxury automobiles and delivers the credit to people who need it the most. Buyers must meet yearly adjusted gross income caps of $150,000 for individuals, $225,000 for heads of household, or $300,000 for a joint household. Plus, only sedans under $55,000 and SUVs and vans under $80,000 will qualify.
Third, the IRA offers a used EV tax credit for the first time ever, worth 30% of the sale price up to $4,000 (the sale price cannot exceed $25,000); transformative given that used cars account for more than 25% of all new car sales in the United States each year. Additionally, there are no specifications for components, materials, or production processes for used EVs. More low- and moderate-income customers will benefit from the tax credit thanks to income ceilings of $75,000 for individuals, $112,500 for heads of household, or $150,000 for joint households.
Fourth, by establishing a new 30% business EV tax credit (up to $7,500 for smaller vehicles weighing less than 14,000 pounds and up to $40,000 for larger vehicles weighing more than 14,000 pounds), the IRA opens up the underserved market for commercial EVs and fleets. This tax credit will save businesses and truck drivers money by assisting fleet operators to electrify the more than 8 million commercial cars and trucks already employed in fleets in the United States.
The majority of the harmful NOx emissions (a precursor to smog and soot) and around 25% of the carbon dioxide emissions in the transportation sector are produced by medium- and heavy-duty commercial vehicles. Scaling the emerging commercial EV sector will significantly improve public health and the environment, especially in areas where vehicle traffic and pollution are a problem.
Should I buy an EV now or wait?
If you’ve already been shopping for an EV and have found one you want to buy, “definitely go ahead and finish the transaction and get it done,” Harto said. But, he warns, it’s probably “going to be challenging for somebody who wasn’t in the market for a new car and saw that this change is coming and is trying to jump into the market and take advantage of the situation quickly.”
The challenge arises from a large demand for EVs and a limited supply — a situation that, Harto said, “has created long wait times and just frankly, absurd dealer markups on EVs.”
Things may only become worse in the immediate future, as consumers scramble for available cars. Harto continues, “We’re in a turbulent time of rapid change in the market. There’s going to be more vehicles, there’s going to be cheaper vehicles in the future. Eventually, a lot of vehicles are going to qualify for the credit again, so there’s not a whole lot of risk in waiting to buy an EV.”
Those trying their luck in the EV market now should be on the lookout for potential dealer markups, Harto said. “It’s not going to do you a whole lot of good to get a $7,500 tax credit if the dealer is going to charge you [$10,000] or $20,000 over MSRP for the vehicle.”
Remember, the new credits are expected to remain in law until 2032, which should be reassuring if you’re worried about your future eligibility. Even if automakers don’t have vehicles that qualify until 2025 or 2026, the bill “still gives them many, many years of eligibility for the credits,” Harto said.
“The common sense thing would be to say: ‘Look, don’t worry. These rebates aren’t going anywhere. They’re fully funded to be around for a while. Do them when they make sense,’” said Jonathan Foley, executive director of Project Drawdown, a climate nonprofit.
Considering an electric vehicle? Click here to learn more about the IRA tax credits for EVs and important dates to keep in mind. Don’t go it alone – consult our experienced tax pros before you buy to make sure you take advantage of all of the new incentives. Call us today at (918) 600-2299 or click here to schedule a consultation.