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Achieving the $7,500 tax credit for buying a new electric car will be difficult for several months, meaning potential buyers who want the financial incentive may want to speed up the timeline.
The Inflation Reduction Act, the historic climate law signed by President Biden in August, changed the rules for an existing tax credit for the purchase of “clean” vehicles.
The law, which extends the tax credit until 2031, changed some of the requirements to receive the full $7,500 value of the “clean vehicle credit.”
Some tax and auto experts believe the changes, aimed primarily at bringing more manufacturing and supply chains within the borders of the United States and allies, will make it temporarily harder to qualify for all or part of the credit.
Some rules are on hold until the IRS issues guidance
Some of the tax credit rules went into effect on January 1. (More on those below.) But others related to battery minerals and components—probably more difficult to meet—don’t go into effect until the IRS issues guidance. The agency plans to do this in March 2023.
At that point, many of the clean vehicles that currently qualify for the tax break may no longer exist—at least until manufacturers can satisfy the new rules.
Consumers in the market for a new electric car, truck or SUV have a limited time to claim the tax credit more easily, experts say.
“There’s almost a three-month grace period,” said Lesley Jantarasami, managing director of the Bipartisan Policy Center’s energy program.
According to IRS data as of Jan. 17, manufacturers have identified 27 all-electric and 12 plug-in hybrid car and truck models that qualify for the tax break under current rules. (Buyers must also meet criteria such as income requirements.)
Tesla lowered the prices of some car models this month, helping them qualify for a tax break. The IRS will likely have additions to the list of vehicles in the coming days and weeks.
Following the IRS guidance, Jantarasami said, “I don’t think there’s any doubt that the list of eligible car models will shrink in the short term.”
If that happens, experts say, consumers could get a separate tax break by buying a used electric car instead of a new one, or perhaps by leasing a car.
How the $7,500 clean car tax credit works
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Clean car credit is a “non-refundable” tax credit. This means that buyers will receive the full benefit if they have an annual federal tax liability of at least $7,500.
Buyers may be eligible if a new plug-in electric or fuel cell vehicle is “into service” after December 31, 2022. A vehicle is put into service when the taxpayer “owns” it, the IRS says; may differ from purchase date.
Some regulations have already restricted the required buyers and vehicles:
- Income: Married couples do not qualify for a new car loan if their modified adjusted gross income on their joint tax return exceeds $300,000. The limit is $150,000 for single taxpayers and $225,000 for heads of household. Buyers can use a small portion of their income in the year they take delivery of the car or in the previous year.
- Price of the car: The credit is not available if the manufacturer’s suggested retail price exceeds $80,000 for vans, SUVs and pickups or $55,000 for other vehicles. Note: MSRP is not necessarily the price you pay for the vehicle.
- Production: The vehicle must undergo final assembly in North America. Buyers with a vehicle’s Vehicle Identification Number (VIN) can check the US Department of Energy’s website to see if it qualifies.
The above list of eligible vehicles provided by the IRS is based on these criteria.
“We don’t know what will happen in March”
Incoming IRS guidance — again expected in March — adds two requirements for car batteries.
The pending regulations would link the $7,500 credit amount to whether the new clean vehicle’s battery meets the critical mineral and battery component requirements.
- Critical minerals: Generally, the rule requires that a certain portion of the battery’s critical minerals be “mined or processed in the United States or any other country.” [it] Free trade agreement in force or recycling in North America”, according to the Treasury Department document. This share increases over time: 40% or more in 2023; 50% in 2024; 60% in 2025; 2026 70% in , and then 80%.
- Battery components: At least half of the vehicle’s battery components (whom battery cells and modules) must be manufactured or assembled Starting in 2023 in North America. This share increases to 60% in 2024 and 2025, and gradually to 100% in 2029.
Vehicles that meet one of these requirements receive half the credit ($3,750). Vehicles matching both receive full value.
It is likely that when these two requirements go into effect, few, if any, new clean cars will qualify for the full $7,500.
“We encourage consumers who are interested in buying and who are in a place to buy now to do so,” said Ingrid Malmgren, policy director of Plug In America, a nonprofit advocacy group for clean vehicles. Because we don’t know what will happen in March.”
Until March, the full value of the loan depends on the calculation of the battery capacity.
Vehicle specifications such as battery capacity, final assembly location and VIN are listed on the window sticker, the IRS said.
Drivers have other options for receiving tax credits
However, if the current list of eligible vehicles is shortened in March, there are other options available to buyers.
Households can buy a clean used car and get a tax credit of up to $4,000, experts say. According to experts, the tax break, available on January 1, comes with some requirements for the car and the buyer, but is generally less stringent than those for new cars.
Additionally, dealers who lease clean cars can pass some of the tax savings on to consumers. In that case, a dealer claiming a tax credit for commercial clean vehicles, for example, could pass on part of the $7,500 tax credit as a break on the lease or down payment, Malmgren said. This commercial credit is not subject to revenue, battery, assembly or MSRP requirements, he said.
However, consumers should ask dealers before leasing, he added, because such businesses are unlikely to be able to pass on the tax credit or money to consumers on leasing.