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Obtaining the $7,500 tax break for the purchase of a new electric vehicle will likely become more difficult in a few months, which means potential buyers who want to take advantage of the financial incentive may want to speed up their timeline.
The Cut Inflation Act, a landmark climate law that President Biden signed in August, changed the rules for an existing tax credit associated with the purchase of “clean” vehicles.
The law, which extended the tax relief to 2031, changed some requirements to get the full $7,500 value of the “clean vehicle credit.”
Some tax and auto experts believe the adjustments — primarily intended to bring more manufacturing and supply chains inside U.S. and allied borders — will temporarily make it harder to qualify for some or all of the credit.
Some rules are on hold until the IRS issues guidance
Some of the tax credit rules came into effect on January 1. (More on that below.) But others regarding minerals and battery components — arguably the hardest to meet — don’t go into effect until the IRS issues guidance. The agency plans to do so in March 2023.
At that time, many clean vehicles that currently benefit from the tax relief may no longer be, at least until manufacturers are able to meet the new rules.
Consumers looking for a new electric car, truck or SUV likely have a limited time in which to claim the tax break more easily, experts said.
“There’s almost a three-month grace period,” said Lesley Jantarasami, executive director of the energy program at the Bipartisan Policy Center.
Manufacturers have identified 27 models of all-electric cars and trucks and 12 plug-in hybrids that are eligible for the tax relief based on existing rules, according to IRS data as of Jan. 17. (Buyers must also meet criteria such as income requirements.)
Tesla cut prices for some car models this month, helping them get a tax break. There will likely be additions to the vehicle list in the days and weeks to come, the IRS said.
After the IRS guidance was released, Jantarasami said, “I don’t think there’s any doubt that the list of eligible car models will shrink in the short term.”
If that happens, however, consumers can instead get a separate tax break for buying a used electric car instead of a new one, or perhaps leasing a car, said experts.
How the $7,500 Clean Vehicle Tax Credit Works
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The clean vehicle credit is a “non-refundable” tax credit. This essentially means that buyers only get the full benefit if they have an annual federal tax liability of at least $7,500.
Buyers can qualify if the new plug-in electric or fuel cell vehicle is “put into service” after Dec. 31, 2022. A car is put into service when the taxpayer “takes possession of it,” the IRS said; which may differ from the date of purchase.
Some rules have already been put in place that limit eligible buyers and vehicles:
- Returned: Married couples are not eligible for the new vehicle credit if their adjusted adjusted gross income on a joint tax return exceeds $300,000. The limit is $150,000 for single filers and $225,000 for heads of households. Buyers can use the lesser of their income from the year they take delivery of the car or from the year before.
- Vehicle price: The credit is not available if the manufacturer’s suggested retail price exceeds $80,000 for vans, sport utility vehicles and pickup trucks or $55,000 for other vehicles. Note: MSRP is not necessarily the price you pay for the car.
- Manufacturing: The vehicle must have undergone final assembly in North America. Buyers who have a car’s vehicle identification number (VIN) can check a US Department of Energy website to find out if it qualifies.
The aforementioned list of eligible cars cited by the IRS is based on these criteria.
“We don’t know what will happen in March”
The next IRS guidelines — again, expected in March — add two requirements for car batteries.
The pending rules will tie the $7,500 credit amount to whether a clean new vehicle’s battery meets a critical mineral and battery component requirement.
- Critical Minerals: Broadly speaking, the rule requires that a certain portion of the battery’s critical minerals be “mined or processed in the United States, or any country with which [it] has a valid or recycled free trade agreement in North America,” according to a Treasury Department document. This share increases over time: 40% or more in 2023; 50% in 2024; 60% in 2025; 70% in 2026; and 80% thereafter.
- Battery components: At least half of the vehicle battery components (like cells and battery modules) must be manufactured or assembled in North America from 2023. This share increases to 60% in 2024 and 2025, and gradually increases to 100% in 2029.
Cars that meet any of these requirements get half the credit ($3,750). Cars that meet both get full value.
It is likely that few, if any, new clean vehicles will be eligible for the full $7,500 when these two requirements come into effect.
“We encourage consumers interested in buying and somewhere to buy right now to jump on it,” said Ingrid Malmgren, director of policy at Plug In America, a nonprofit clean vehicle advocacy group. “Because we don’t know what’s going to happen in March.”
Until March, the total value of the credit is rather linked to a calculation of the battery capacity.
Vehicle specifications such as battery capacity, final assembly location and VIN are listed on the window sticker, the IRS said.
Drivers have other options for getting tax credits
However, other options are available to buyers if the current list of eligible vehicles is shortened in March.
Households can buy a clean, used vehicle and get a tax break of up to $4,000, experts said. This tax relief, which became available on January 1, comes with certain requirements for the car and the buyer, but is generally less stringent than that for new vehicles, experts said.
Additionally, it is possible that dealers who lease clean cars could pass on some tax savings to consumers. In that case, a dealership claiming a clean utility vehicle tax credit could pass on some of their $7,500 tax relief in a lease or as a break on the down payment, for example, Malmgren said. This trade credit is not subject to income, battery, assembly or MSRP requirements, she said.
However, consumers should ask dealerships before renting, she added, as it is unclear whether such entities would qualify for tax relief or pass money on to consumers under a lease.