- The Inflation Reduction Act of August 2022 will apply to new electric car purchases.
- Theoretically, you could be eligible for a $7,500 EV tax credit on new EVs and $4,000 on used EVs.
- But there’s a catch that could prevent you from availing of the full amount in the case of new EV purchases.
The updated EV tax credit scheme has made the entire process rather complex. Earlier, if the company of the EV or PHEV (Plug-In Hybrid Vehicle) that you purchased had sold less than 200,000 EVs or PHEVs, you would have received the full $7,500 tax credit on the qualifying EVs. But now, there are many layers including income caps, price caps on eligible EVs, location of manufacturing of EV (US or outside) and source of battery components (US or outside). You won’t get the full amount if all of these criteria are not fulfilled.
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Additionally, the amount of tax credit that you are eligible to get until the end of 2023 can be availed of at the time of filing the ITR (Income Tax Returns). But starting 2024, you will be able to apply the amount directly at the time of purchasing the EV, reducing the initial cost straightaway. This will allow car buyers to take lower credit through financial institutions, a great pull for a lot of new EV buyers.
Under this act, the term used to describe EVs is “Clean Vehicles”. This means that EVs, PHEVs as well as Hydrogen cars will be eligible for the tax rebate/credit. This act will continue until 2032.
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EV Tax Credit Depends on Many Factors
- Modified Adjusted Gross Income (MAGI) – The EV buyer must have a MAGI of $150,000 or less if he/she is a single filer and $300,000 for joint filers where heads of household must have a MAGI of $225,000 or less.
- Price Caps – Secondly, the Federal Electric Car Tax Credit is applicable to EVs (cars) priced at $55,000 or less. For electric trucks and SUVs, the price cap is $80,000 or less.
- Production of EV – The qualifying vehicles must be built in North America with exceptions like Chrysler Pacifica Hybrid built in Canada and Ford Mustang Mach-E assembled in Mexico. Carmakers like Kia, Hyundai, Porsche, Audi, Genesis, Subaru, etc will be out of this tax benefit scheme since they have no manufacturing units in North America.
- Production of Battery – The $7,500 EV tax credit amount is divided into two parts of $3,750 each. To get the first section, the components of the battery must be manufactured in the USA or in countries that have a free-trade agreement with the USA. For 2023, 50% of battery components must comply with this rule. This figure will go up to 60%, 70%, 80%, 90% and 100% every year from 2024 to 2029 respectively.
- Source of Raw Materials – The other $3,750 will depend on where the raw materials for the battery are sourced or recycled. It has to be either the USA or a country that abides by the US free-trade agreement. In 2023, 40% has to meet this criterion which will go up to 80% in 2027. Moreover, no battery component can come from countries like Russia, China, North Korea and Iran. There is no EV today that meets all these criteria which makes them invalid for the complete $7,500 EV tax credit.
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In conclusion, this new regulation will even allow the EV to re-attain the eligibility for the tax rebate who has previously lost it on account of the aforementioned rule where a 200,000 vehicle limit for a carmaker was applied. These companies were Tesla, GM and Toyota. Going forward, EVs from these three auto giants will also become eligible for the tax benefit yet again.