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A federal tax credit included in the Inflation Reduction Act aims to expand access to electric vehicles (EVs), while also introducing new limitations that could make it hard to qualify for now.
The IRA, signed into law last week by President Joe Biden, is poised to revamp the U.S. energy landscape by making greener technology more affordable for lower- to middle-income consumers, as well as deliver other reforms on drug pricing, tax enforcement and more. But despite its transformational potential, new requirements in the law that start Jan. 1, 2023, actually make most currently available EVs ineligible for the credit.
No matter what, the auto industry is making the transition to electric power. California regulators on Thursday voted to implement a plan to ban the sale of gasoline-powered cars by 2035, a move intended to divert business instead to EV manufacturers. As the largest market for auto sales in the United States, California’s moves on emissions and climate are broadly influential and a dozen or so other states are expected to follow suit, including Washington and Massachusetts.
READ MORE: California moves toward phasing out sale of gas-powered vehicles by 2035
Here’s what electric vehicle researchers and a tax expert say you need to know about requirements to claim the tax credit, which vehicles qualify and more.
The existing federal EV tax credit offers consumers $2,500 to $7,500 in credit for vehicles with a battery capacity of at least 5 kilowatt-hours, but starts to phase out after the manufacturers’ first 200,000 qualifying electric vehicles have been purchased.
The new law allows consumers to get up to $7,500 no matter how many cars have been sold, said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center at the Urban Institute.
Whereas the original credit only applied to the purchase of new vehicles, the new credit also expands eligibility to used vehicles, said Nick Nigro, founder of Atlas Public Policy and an expert on alternative fuel vehicle financing, policy and technology. Nigro said that this is significant because used vehicles account for the vast majority of vehicle purchases in the country.
Eligible used vehicles qualify for a credit of up to $4,000 under the Inflation Reduction Act.
Also, the new credit is not a traditional delayed tax credit, said Gil Tal, director of the Plug-in Hybrid and Electric Vehicle Research Center at UC Davis. Instead, it’s what is known as “cash on the hood,” or a rebate that is applied at the point of sale.
This means that buyers won’t need to finance the full price of the car before getting the money back when they file their taxes. Instead, if the purchase is eligible for the tax credit, the actual price of the car at the dealership will immediately be up to $7,500 lower.
Tal added that the credit applies to full electric vehicles, as well as plug-in hybrid cars, as long as the vehicle meets the minimum battery capacity requirements.
Despite these expansions, the new tax credit also introduces new restrictions for consumers and manufacturers.
There are two main restrictions on the consumer side: the price of the car and the income of the buyer.
For new vehicles, the manufacturer’s suggested retail price, or MSRP, must be below $55,000 for sedans and below $80,000 for vans, trucks and SUVs to be eligible for the credit.
“If you want to buy a very expensive, fancy car, you probably don’t need the government to help you,” Tal said.
Likewise, the buyer must have a modified adjusted gross income less than or equal to $150,000 for single filers, $300,000 for married couples filing jointly and $225,000 for those filing as head of household.
This is where the new EV tax credit runs into some logistical hurdles. A provision in the bill limits eligibility for the tax credit to vehicles manufactured in North America and powered by batteries whose materials are sourced from the U.S. or its free trade partners. Currently, many American EV manufacturers, including Tesla, rely on battery materials processed in China — a country classified by the bill as a “foreign entity of concern.” And any vehicle that was not assembled in the U.S., Mexico or Canada is off the table.
While fewer Americans qualified for the original tax credit, fewer manufacturers qualify for the new one, Nigro said.
In fact, Nigro and many others studying this issue confirmed earlier this month that manufacturing restrictions written into the bill mean that nearly all EVs sold today would not qualify for the credit.
However, since the bill was passed, the Alternative Fuels Data Center at the U.S. Department of Energy has compiled a list of vehicles with final assembly in North America that may qualify.
The list includes both manufacturers that have and have not reached a cap of 200,000 EV credits already used, so not every manufacturer listed will qualify for the new credit until after Dec. 31, 2022. For example, Chevrolet — which has already hit the 200,000 cap — will likely not qualify until next year, according to Consumer Reports.
So what can consumers actually do once the tax credit takes effect in January 2023?
Right now, there’s not much a consumer can actively do to make sure that they get the tax credit, Nigro said.
“The ball’s really in the court of the industry to deliver [eligible vehicles], based on the details of the proposed legislation,” he said.
Nigro explained that the lead time for EV manufacturers to extract minerals and build batteries in various countries can take several years.
But this is a case of the government trying to accomplish three things at once, Gleckman said.
“It’s trying to encourage people to buy EVs, it is limiting the benefits to people making less than a certain amount of money — it’s trying to be progressive in the design of the tax code,” he said. “And it’s also trying to impose a ‘Made in America’ standard on the cars.”
That last piece — ensuring that the sourcing of materials for these vehicles is sound, sustainable and beneficial to the nation’s economy and security — is critically important, according to Nigro.
“The facets of the bill that are aimed at building out that security, building that domestic capacity, are going to be beneficial to the industry in the long term,” he said. “Really it’s a question of timing, and whether or not all the stars are going to align for the industry to be able to deliver product in the time frame written into this legislation.”
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