Thinking of getting a new EV? Maybe don’t wait for 2023.
The Inflation Reduction Act (IRA) promises to not only supercharge the electric vehicle industry, but also US manufacturing and the sourcing of battery components. The requirements to accomplish this will cost money, but most of those costs are also subsidized under the IRA, protecting the consumer from bearing the additional costs of US investment.
That’s all good news for the EV industry and US manufacturing. But, if you’re in the market today for an EV, you may want to act more quickly than waiting for the increased incentives that are coming down the line. If you are planning on getting an EV in the next two years, you may be better off either purchasing an EV before January 2023, or taking advantage of the new Used EV tax credit that will go into effect next year.
The domestic assembly, battery manufacturing and critical mineral components of the IRA are the triggers for the full $7,500 tax credit available to buyers of EVs beginning in 2023. Even though those requirements will ramp up over time, it will likely be a year or two before a wide range of EV options will qualify for the full tax credit.
The tax credit that existed prior to IRA Bill signing on August 16, 2022 was based on the number of electric vehicles a manufacturer had sold. Every manufacturer could offer a $7,500 tax credit on the first 200,000 vehicles sold. That meant that Tesla and GM had already met their manufacturing limit (Nissan was very close behind). After August 16, a domestic production requirement was added, that is, the vehicle had to be assembled within the countries in the North American Free Trade Agreement - US, Mexico and Canada. Most vehicles meet that requirement with a few exceptions, but you can check your VIN to make sure.
That requirement will change again in January 2023. At that point the $7,500 tax credit is divided into two components: 1) $3,750 is based on 50% of the battery components being assembled in North America, and 2) $3,750 is based on 40% of the minerals that go into the production of batteries being processed in the US or a free trade country. The required percentages increase each year. This is already leading to companies shifting their manufacturing to the US, and promises to be a boon for US manufacturing and sourcing of materials - but it will likely take some time. This may lead to a donut hole of incentives between those available today and those available when production and materials are available to a broad swath of vehicle options.
Initially, buyers will have to file taxes to receive their credit but credits become transferable in 2024 allowing savings at the point of sale. Also, the new vehicles must be offered for less than $55,000 for sedans and $80,000 for SUVs and Trucks. Sorry, that electric Lamborghini will not qualify.
Beginning in 2023, there will be a new tax credit available for used vehicles. While the battery and manufacturing requirements don’t apply to those vehicles, there are a few restrictions:
First, the vehicle must be purchased from a dealer. Second, the EV credit can only be taken once per vehicle - that is, once a used EV credit is claimed, that vehicle cannot qualify for a credit again. Third, once you accept a tax credit for a used vehicle, you cannot claim another used EV tax credit for 3 years. Fourth, the vehicle cannot be sold for more than $25,000.
That covers the vehicles, but there are also restrictions on who qualifies for EV tax credits. In 2022, there are no restrictions, but beginning in 2023, individuals making over $75,000 or couples filing jointly making more than $150,000 will not qualify (head of household can qualify up to $112,500) for a used EV tax credit. Those numbers go up to $150,000 for individuals and $300,000 for married filing jointly (or $250,000 for head of household) for new EVs - but as was mentioned before, available vehicles qualifying for the full credit will likely be very limited.
So, if you are in the market today for an electric vehicle, take a look at these restrictions and understand that the basis for tax credits on new vehicles may limit your options for a few years. After that, we should see not only many vehicle options available for the full credit, but a re-invigorated domestic supply chain and production infrastructure.