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Buying an EV? Here’s how recently passed federal legislation might impact you.

The longstanding $7,500 federal tax credit for electric vehicles (EV) is one of the most compelling incentives for drivers interested in “going electric.” In August 2022, that tax credit got a major facelift through some new provisions in the Inflation Reduction Act. To qualify for the tax credit:

  • Buyers must have an income below a certain threshold,
  • The vehicle they select must not exceed a certain price point, and
  • The vehicle’s battery must be made in North America.

These new provisions were aimed in part at keeping EVs affordable for middle-income Americans, but the details are important to understand as you consider your EV purchase.

Making EVs more affordable

The good news for those interested in purchasing an EV is that many of the provisions in the Inflation Reduction Act are aimed at making EVs more affordable to more Americans. Consider:

  • Extending the tax credit for EV buyers: The EV tax credit, which is still up to $7,500, has been extended through Dec. 31, 2032. That 10-year lifespan is expected to create some stability in the EV market.
  • Focusing on lower and moderate priced cars: Vehicles only qualify for the new EV tax credit if their sticker price falls under certain caps – $55,000 MSRP for sedans, hatchbacks, and station wagons, and $80,000 MSRP for trucks, SUVs, and vans. Currently, the average price of a non-luxury EV is around $56,000. It is hoped that these price restrictions could encourage some automakers to lower the sticker price of their EVs. But buyers should be aware that premium options, such as advanced sound systems or leather seats, could tip the price point over the limit.
  • Targeting the middle class: Beginning January 1, 2023, the EV tax credit will only be available to individuals making less than $150,000, or couples making less than $300,000.
  • Removing the cap on the number of eligible cars: Prior to the Inflation Reduction Act, only the first 200,000 electric vehicles sold from each car manufacturer were eligible for the EV tax credit. The new law removes that cap, allowing more cars to qualify for the tax credit. Models that were previously ineligible due to exceeding the cap are now free to claim the credit again.
  • Including used vehicles: The previous EV tax credit only applied to new vehicles. Now, pre-owned EVs are eligible for up to $4,000 in tax credits. The used vehicle must cost less than $25,000 and be more than two years old. Used vehicles do not have to comply with the made-in-America requirements detailed below.

Other Important Details

Other provisions in the IRA are aimed at limiting foreign influence over the U.S. EV supply chain and helping to curb climate change. The impact of these provisions on the overall affordability of EVs is yet unknown. Notably:

  • Vehicle origin: The most substantial stipulation in the new law is that EVs must be assembled in North America, contain batteries built in North America, and use minerals mostly mined in North America in order to qualify for the tax credit. In the short term, this may mean that fewer cars qualify for the EV tax credit. But the Inflation Reduction Act also contains a number of tax incentives to help more manufacturers shift production to meet these requirements over time.
  • Battery capacity: The tax credit of “up to” $7,500 for new cars and $4,000 for used cars is calculated based on the size of the car’s EV battery. It is hoped that this provision will provide greater incentives to cars that have a greater impact on reducing air pollution. While this is seen as a more fair approach to the amount of tax credit granted, it also complicates the process for consumers. Essentially, the base incentive is $2,500 and increases another $417 for every 5 kWh of battery capacity – up to a maximum of $7,500 for new vehicles. Consumers will have to work with their auto dealer rep to calculate the incentive they are due.

So, which EVs qualify for the tax credit?

Today, only around 15 EV models currently sold in the U.S. are expected to meet the price requirements. But that number is expected to grow as auto manufacturers adjust to these new incentives and requirements. Stay tuned as more EVs become eligible!

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