The Inflation Reduction Act, passed in August 2022, brought with it a significant investment into clean energy, and numerous changes to the preexisting electric vehicle tax credit. While the tax credit of up to $7,500 remains available, new qualifications and restrictions have been put into place.
Prior to purchasing an electric vehicle, it is important to understand the requirements that must be met to obtain the credit. These rules apply to vehicles purchased from 2023 to 2032.
Income Limits for New Vehicles
To qualify for the credit when purchasing a new vehicle, a taxpayer’s Modified Adjusted Gross Income (MAGI) must be below:
- $150,000 for single filers
- $225,000 for head of households
- $300,000 for married couples filing jointly
Taxpayers can use their MAGI from the year they take delivery of the vehicle or the year before, whichever is less. If your income exceeds these levels in both the current and prior year, you will not be able to claim the credit.
Additionally, the credit is nonrefundable, meaning you cannot get back more credit than your total tax for the year and the unused credit does not carry forward into future years.
Purchase Price Limits for New Vehicles
The vehicle purchased must have a manufacturer-suggested retail price (MSRP) of no more than:
- $80,000 for SUVs, vans, and pickup trucks
- $55,000 for any other qualifying vehicle
Manufacturing Requirements
One of the goals of the Inflation Reduction Act is to bring manufacturing back to the United States/North America. To do so, several new manufacturing requirements were introduced:
- Final assembly of the new vehicle must occur in North America
- Starting in March 2023:
- At least 40% of the critical battery minerals must have been recycled or processed in the United States or in a country that has a free trade agreement with the U.S. This will increase to 50% in 2024, 60% in 2025, 70% in 2026, and 80% in 2027.
- At least 50% of the battery components must be manufactured or assembled in the U.S. or in a country that has a free trade agreement with the U.S. This will increase to 60% in 2024-2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% in 2029.
- Beginning in 2024, if any minerals or components are sourced from ‘foreign entities of concern,’ which includes China and Russia, the vehicle will not qualify for the credit.
The vehicle must also have a battery capacity of at least 7 kilowatt hours and a gross vehicle weight rating of less than 14,000 pounds.
Prior to purchasing, you can use the US Department of Energy’s VIN Search Tool to ensure the vehicle qualifies under the new requirements.
What About Used Vehicles?
For the first time, the tax credit has been expanded to used vehicles, but there are numerous restrictions to consider.
- The credit is for the lesser of $4,000 or 30% of the sales price of the used vehicle.
- The sales price cannot exceed $25,000.
- The vehicle must be at least 2 years old.
- The vehicle must have a gross vehicle weight rating of less than 14,000 pounds and have a battery capacity of at least 7 kilowatt hours.
- You cannot be the original owner and you must purchase the vehicle for use, rather than resale.
- You cannot be claimed as a dependent on another person’s tax return.
- You cannot have claimed another used vehicle credit in the 3 years before the purchase date.
- Lastly, your MAGI may not exceed:
- $75,000 for single filers
- $112,500 for head of households
- $150,000 for married couple filing jointly
As you can see, while there can still be tax benefits to purchasing an electric vehicle, you must be conscious of the new rules in place and understand how they may impact your ability to qualify for the credit.
Are you considering the purchase of an electric vehicle this year? Before making your final decision, we recommend talking to your advisor for additional insight. If you’d like to schedule an appointment with an advisor, please click here.
