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The start of the new year means the start of a new EV tax incentive in the US. Previously, the IRS allowed taxpayers to claim a tax credit of up to $7,500 for a new plug-in vehicle, with the exact amount determined by the battery’s capacity in kWh. Additionally, the credit was designed to end once a manufacturer sold its 200,000th plug-in, though only Tesla and General Motors have ever reached that milestone.
But the Inflation Reduction Act (IRA) of 2022 rewrote tax incentives for plug-in vehicles, and the new rules went into effect in early January. Now the tax credit applies to “clean vehicles” rather than plug-ins, and covers fuel cell electric vehicles, some plug-in hybrid electric vehicles and all battery electric vehicles.
However, it is now a more complex animal. The maximum tax credit is still $7,500, but to qualify, a vehicle must have a battery capacity of at least 7 kWh, a gross vehicle weight of less than 14,000 pounds, and be fully assembled in North America. There are price caps – vans, SUVs and pickups can’t cost more than $80,000, and other vehicles must stay under $55,000 to qualify. There are also income caps: $300,000 for married couples filing jointly, $225,000 for heads of household, and $150,000 for other taxpayers.
And as before, it’s a tax credit, meaning you must have at least as much tax liability as the credit during the year the car was purchased. If your total federal tax liability for the year is less than $7,500, you can claim only as much credit as that liability.
There are also commercial clean vehicle tax credits, used clean vehicle tax credits, and leased vehicle tax credits. We’ll explain how these work later in this article.
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Made in the USA
When the law was passed last year, the most controversial change to electric vehicle tax credit rules concerned where battery components are manufactured and assembled. Half of the loan — up to $3,750 — is tied to sourcing the battery’s critical minerals, which must be extracted or processed in the U.S. or a country with which it has a free trade agreement. For 2023, that amount must be at least 40 percent and increase by 10 percent per year through 2027, when at least 80 percent of these critical minerals must be extracted or processed in the United States or a Free Trade Partner nation.
The other $3,750 is tied to the proportion of battery components that were manufactured or assembled in North America. Again, this is an increasing percentage over time, starting at 50 percent of the value of the battery’s various components for 2023, 60 percent for 2024-2025, 70 percent in 2026, and then increasing by 10 percent per year through 2029, when the entire value of battery components must be manufactured or assembled in North America.
In addition, some conditions mean that from 2024 some vehicles will be excluded from credit if they contain battery components from a foreign company of concern.
Wait a minute, I’ve got an update
Although required by law, the IRS does not currently enforce it. Domestic procurement and value requirements are difficult to calculate, and in late December the US Treasury Department said it would not have guidance on battery minerals and component procurement until March.
By then at least, all qualifying clean vehicles should qualify for the full $7,500 credit, but which ones qualify?