The Inflation Reduction Act could help you save more on an electric vehicle — but qualifying for the ev tax credit could also get more complicated.
The economic package, which addresses health care costs, climate change and taxes on corporations, passed in both the Senate and House this week.
As part of this bill, Congress will extend the $7,500 EV tax credits for new electric vehicles, and add a $4,000 tax credit for used electric vehicles. It’s also eliminating a sales cap currently in place, which could allow vehicles from big-name electric automakers like Tesla and Toyota to become eligible again.
But it’s also adding restrictions regarding the car’s price and the buyers’ income, as well as where the parts are produced.
Some industry experts argue that the stricter guidelines around this tax credit will actually reduce EV sales.
If President Biden signs the bill as it stands (and he likely will), this legislation will go into effect next year. The credits will then stay in place through 2032.
What Does the New EV Tax Credit Mean for Car Buyers?
Under the Inflation Reduction Act, consumers can still get a $7,500 tax credit when buying a new electric vehicle. There is also a new element in the legislation that is especially attractive to people who like to buy on a budget. Used electric vehicles will be eligible for a $4,000 tax credit (or 30% of the vehicle’s price, whichever is lower) when the bill goes into effect.
Congress has also eliminated the 200,000 model sales cap currently in place. Right now, once an automaker hits 200,000 new EV sales, its vehicles no longer qualify for the electric vehicle tax credit. As of today, Tesla, General Motors, and Toyota are all disqualified — and Ford isn’t far behind. All these automakers will be back in the game starting next year.
But this new legislation contains a lot more language that can quickly disqualify the car you may want to buy.
EV Tax Credit Rules for New Car Buyers
The act calls for price caps on new vehicles: $55,000 for electric sedans and $80,000 for electric SUVs, vans and trucks.
But that’s not the only monetary cap. The EV tax credits would only be available to single tax filers with an adjusted gross income of $150,000 or less. Married couples who file jointly would max out at $300,000; individual filers with head of household status must make $225,000 or less to qualify.
There’s another key stipulation in that legislation: The EV’s battery must have been built in North America. Over time, the bill will require a higher percentage of battery components to be sourced from the continent as well, with no Chinese components allowed by the end of 2023.
Depending on who you ask, that could encourage more production here in North America.
Or, the new restrictions will simply make most vehicles “immediately ineligible for the incentive,” as John Bozzella, CEO of the Alliance Automotive Innovation, said in a statement. He predicted that within a few years, no electric vehicle will qualify for the tax break.
EV Tax Credit Rules for Used Car Buyers
Like the new EV tax credits, the used electric vehicle tax incentives also come with some strings attached.
The price cap for used EVs is $25,000, and there are income restrictions. Individual tax filers who make more than $75,000 are ineligible. The income cap is $150,000 and $112,500 for joint filers and heads of household, respectively.
Is Now a Good Time to Buy an Electric Vehicle?
If fewer EVs will be eligible for tax credits starting in 2023, is now a better time to buy an electric car? Not necessarily. Here are a few things to consider when deciding when to buy an electric vehicle:
What’s the Current Markup?
With continued supply chain issues and rising inflation, many car dealerships are marking up their new car prices by $10,000+ over MSRP. Prices will likely fall back as we come out of supply chain shortages and rampant inflation. Even if you’d get a $7,500 tax credit by purchasing this year, you might still lose more money by paying well over MSRP.
What Brand of EV Do You Want?
Hoping to drive home in a Tesla, Toyota, or Chevy? None of those automakers currently qualify for the EV tax credits because of the sales cap. Starting in 2023, those automakers will be able to enter the program once again.
Would You Rather Buy Used?
Buying a used EV already entails significant savings, but if you want an even better deal, wait until 2023. That’s when the used EV tax credits kick in.
Can You Wait a Few Years?
When the new regulations take effect in 2023, many vehicles may suddenly become ineligible for tax credits. But the new legislation lasts until 2032; this 10-year window gives automakers time to adjust their production sourcing so more of their vehicles will qualify.
Could You Really Get a New EV This Year if You Wanted?
Of course, you can still try to buy an electric vehicle now if you think it’s the right time. But with some models taking several months to be delivered, it’s possible you might not even drive home in your new EV until after the new year, depending on how fast you move and how quickly your dealer can get your preferred model.
Hybrids may not qualify for tax credits, but they offer some benefits over EVs (cheaper sticker price and no range anxiety). Check out our hybrid vs. electric vehicle comparison.
How EV Tax Credits Work
If you’re counting on a $7,500 or $4,000 electric vehicle tax credit, it’s important to remember how that will actually impact your finances.
Uncle Sam won’t be waiting at your driveway with a ridiculously enormous cardboard check for $7,500 when you buy a new EV. Instead, you can use the tax credit to reduce your tax bill when you file, so you won’t feel an impact until the following year’s tax season.
Even then, EV tax credits aren’t refundable. That means if the total amount you owe the federal government from your income in a given year is less than your EV tax credit, you won’t be refunded the remaining balance of the full credit.
Still confused? Get a refresher on how tax credits and tax deductions work.
Contributor Timothy Moore is a writer and editor in Cincinnati who covers banks, loans insurance, travel and automotive topics for The Penny Hoarder.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
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