Electric vehicle tax credit running into roadblocks
Federal changes tied to where car is made, buyers’ income
The federal tax credit for electric vehicles is about to undergo a major overhaul — and one with major ramifications for car buyers.
Many, if not most, EVs that currently qualify for the credit probably won’t next year. But purchasing a car that still qualifies before year-end may be a challenge, as inventories are extremely low. Meanwhile, some cars that don’t qualify today could become at least partially eligible next year.
The Inflation Reduction Act signed into law on Aug. 16 made sweeping changes to the 13-year-old federal credit,
available for the purchase of new all-electric models and plug-in hybrids with an electric and small gas motor. The credit is still worth up to $7,500.
The new rules — designed to fight climate change, create U.S. jobs and safeguard national security — are so complex they’ve created a Fran
kencredit.
And they will have an outsize impact in California, which accounted for 39% of U.S. all-electric vehicle registrations in 2021. This year, more than 1 out of 6 vehicles sold in California was all-electric or a plug-in hybrid. The state also said it will ban the sale of new gasolinepowered vehicles by 2035.
What’s changing?
One huge change, which requires cars to be assembled in North America, already took effect on Aug. 17 and disqualified a large number of models. But more big changes take effect Jan. 1.
For the first time, there will be an income limit for buyers, a price limit for vehicles and battery-sourcing requirements.
The new rules do away with the manufacturer cap, which phased out the credit for all EVs from any maker that sold more than 200,000 EVs in the United States. That could put some Tesla and General Motors models back in contention next year.
Price limits: The credit will not apply to cars with a manufacturer's suggested retail price higher than $55,000, or to trucks, vans and SUVs priced higher than $80,000. It's not clear whether smaller “crossover” SUVs will be considered SUVs or how the MSRP will be calculated.
Income limits: Buyers will get zero credit if their modified adjusted gross income exceeds, “by even one dollar,” $150,000 for individuals or $300,000 for married couples, said San Francisco CPA Richard Pon.
Based on a study of EV buyers, “we found that about 60% would have incomes that would qualify for the credit,” said Michael Fiske, a stock analyst with S&P Global Mobility.
New credit calculation: Under the old rules, most EVs purchased after 2009 qualified for a credit up to $7,500, based on their battery size. In 2020, 16,758 taxpayers claimed $110.7 million in credits, or about $6,600 each.
Buyers will still claim the credit on their tax return, but starting next year, it will consist of two parts: $3,750 if it meets “critical minerals” requirements, $3,750 if it meets “battery component” requirements, or $7,500 if it meets both.
Sourcing requirements: The first requirement says that 40% of the battery's critical minerals, by value, must come from the U.S. or one of its 20 freetrade partner countries in 2023, rising to 80% after 2026.
The second says that 50% of battery components must be made or assembled in North America in 2023, rising to 100% after 2028.
No manufacturer limits: Credits will no longer expire because a maker has sold too many EVs. The credit hit zero for all Tesla and General Motors models in 2020 and started phasing out for Toyotas in October. However, no Toyota EVs are assembled in North America.
GM and Tesla EVs are assembled in North America and could become eligible next year if they meet other rules.
Which EVs are eligible for the tax credit?
The U.S. Department of Energy's Alternative Fuel Data Center released a list of about 30 model year 2022 and early 2023 EVs that are assembled in North America that could qualify now. But many, perhaps most, won't be eligible for a credit in 2023 because they cost too much or don't meet sourcing requirements.
Most automakers won't say which models will qualify for the credit in 2023 until the Treasury Department issues final regulations later this year.
In October, GM CEO Mary Barra told analysts, “We do think some of the vehicles will be eligible for the $3,750 credits starting in January and then we'll ramp toward full qualification across the broad portfolio in two to three years.”
As for Teslas, the S and X models “I think are over the price cap,” said David Reichmuth, a senior engineer with the Union of Concerned Scientists in Oakland. Some Model Y crossovers and Model 3 sedans “could possibly qualify,” he said. They were, respectively, the first and second top-selling cars of any kind in California this year.
The Alliance for Automotive Innovation, which represents automakers, said no EVs currently on the U.S. market will get a full credit next year.
More details on the changing rules
New name: The tax incentive will be renamed the Clean Vehicle Credit because it also will apply to hydrogen fuel cell vehicles, which used to qualify for a different credit. However, none of the three hydrogenpowered cars on the U.S. market are assembled in North America, said Michael Fiske, a stock analyst with S&P Global Mobility.
New reporting requirements: The seller of the EV must give the Internal Revenue Service the buyer's name, Social Security number, the vehicle's identification number and battery capacity and the maximum allowable credit.
What happens if you’re buying an EV now?
If you took delivery of a new EV before Aug. 16, nothing in the new law applies.
If you signed a “written binding contract” to purchase a new EV before Aug. 16, but do not take possession until Aug. 16 or later, you also can claim the
credit under all the old rules, the IRS said in its transition rules.
If you purchase and take possession of an EV between Aug. 16 and Dec. 31, the current rules — not the 2023 rules — apply. That means the car must be assembled in North America and can't be subject to the manufacturing cap to be eligible for the tax credit. But the price and income limits and sourcing requirements don't apply.
The IRS didn't say what happens if you sign a binding contract after Aug. 15 but can't take delivery until next year. But Michael Henaghan, a tax expert with Wolters Kluwer, said in that case, all the rules in effect for 2023 would apply.
Buyers caught in this transition period have tough decisions to make.
Joshua Mendoza, a Sacramento-area software executive, put a deposit on a Tesla Model Y after the law passed. It was scheduled for delivery in the spring, when a credit might be available. But on Sept. 11, he got a call saying a Model Y was available immediately.
“I saw interest rates going up. And it wasn't clear to me if the Model Y would fully qualify” for the credit, he said. Even if it did, “I wasn't confident the tax credit would offset higher interest rates long term.” So he took delivery the next day.
Nathan Simarro of Pleasant Hill put a refundable deposit down on an American-made Rivian RT1 electric truck in July, with expected delivery in fall 2023 and an expected price above $80,000. On Aug. 10, he got an email from Rivian offering him a chance to sign a binding contract, which would make $100 of the $1,000 deposit nonrefundable “and help you to maintain eligibility to apply for the $7,500 tax credit under its current requirements.”
Simarro said he “thought long and hard about whether to sign a binding contract because it was a year out from delivery.”
But he went ahead and signed the contract Aug. 15 and made his full $1,000 nonrefundable. He hopes that will let him claim the $7,500 credit next year, when the truck will be disqualified because of its price.
What about used and leased cars?
Under the new rules, people who lease new EVs cannot claim the credit, but the leasing company that owns it can. Most leasing companies use it to lower the down and/or monthly payment. The law didn't change that, but the Treasury will have to explain how the leasing company will verify that the lessee doesn't exceed the income requirement, Reichmuth said.
The new law also created a first-ever tax credit for the purchase of previously owned electric vehicles starting next year. To qualify, the used car must weigh less than 14,000 pounds and be purchased from a dealer for $25,000 or less. The model year must be at least two years earlier than the calendar year it's purchased.
The credit is 30% of the price, up to $4,000, whichever is less. The buyer's adjusted gross income can't exceed $75,000 for single or $150,000 for married filers. Assembly and sourcing requirements do not apply, Reichmuth said.
An EV will qualify for a used-vehicle credit only once, but it can still be claimed if the vehicle previously got a newcar credit. Buyers can claim the used-car credit, on different vehicles, every three years.
What’s coming after 2023?
More changes take effect after 2023. For example, no credit will be available if any battery components (starting in 2024) or critical minerals (starting in 2025) come from a “foreign entity of concern,” which includes China and Russia.
And starting in 2024, buyers can get their tax credit at the time of purchase, rather than claiming it on their tax return, by transferring it to a registered dealer.
The federal tax credits expire after 2032.
Does California offer incentives?
California offers residents a rebate (not tax credit) for the purchase of fuel-cell vehicles and electric vehicles, including plug-in hybrids. Income and price limits apply. For information on the Clean Vehicle Rebate Project, see cleanvehicle rebate.org.
On Tuesday, California voters defeated Proposition 30, which would have raised taxes on high-income households, in part to pay for rebates and other incentives for zero-emission vehicle purchases.