Explaining the Inflation Reduction Act EV Tax Credit

Blue Tesla At Super Charger
Explaining The Inflation Reduction Act Ev Tax Credit 2

When President Biden signed the Inflation Reduction Act into law in the summer of 2022, it was widely acknowledged that the new law’s EV tax credit provisions would accelerate the adoption of electric vehicles and, in turn, help to reduce greenhouse gas emissions. The wide-ranging legislation included several provisions that make buying an electric vehicle cheaper for everyday people.

But the law had other aims besides just fighting climate change (that, after all, is why it’s called the Inflation Reduction Act, and not the Greenhouse Gas Reduction Act). One of those aims was to, well, reduce inflation, and another was to protect American manufacturing.

So it was never going to be about simply slapping an EV tax credit on any electric car to encourage more people to buy them. The Inflation Reduction Act EV tax credits had to be more targeted and nuanced that that.

It wasn’t until six months later, when the Treasury Department issued its guidelines clarifying the Inflation Reduction Act EV tax credit provisions, that electric vehicle enthusiasts finally understood exactly how they would work.  

Here’s what we’re going to do in this blog post:

  • Delve into every aspect of the Inflation Reduction Act EV tax credits.
  • Talk about goals of the IRA in relation to electric vehicles and list which cars qualify.
  • Highlight the key changes to EV Credits brought about by the Inflation Reduction Act.
  • Explain how these new EV tax credits will affect you and probably impact which electric vehicle you buy

There’s a lot to go over so let’s get started.

Understanding the Inflation Reduction Act

The Inflation Reduction Act (IRA) of 2022 is often referred to as President Biden’s landmark climate bill, so great is its impact expected to be on fighting climate change. The legislation’s scope is wide-ranging, and likely to impact everything from how electricity is generated to how homes are heated, even how steel is manufactured.

And its electric vehicle tax credits will have a huge impact on how we drive. 

The new law extends the electric vehicle (EV) tax credit through December 2032, and aims to create 1.3 million new American jobs and reduce air pollution while promoting clean transportation.

What EV Tax Credits Did the Inflation Reduction Act Replace?

It’s important to note that we had EV tax credits long before we had the Inflation Reduction Act, but they were limited in scope and not very well targeted.

Before the IRA, the federal government offered buyers brand new electric cars a $7,500 EV tax credit but the incentive was only available for the first 200,000 vehicles produced by any one manufacturer.

This was a problem for two of the biggest manufactures in the EV market – Tesla and GM – because they soon reached that threshold and, so, subsequent buyers of their particular models could no longer get the EV tax credit.

But the 200,000 car limit was pretty much the only restriction olf the old EV tax credit. There was no stipulation on the price of the vehicle, how much the buyer earned, where the vehicle was assembled or where it’s myriad components originated.

And the credit only applied to brand new cars, despite the fact that 74% of car purchases in the US are used cars.

What we had was a tax break that encouraged wealthy people to buy brand new imported cars filled with components that were manufactured in countries that, let’s just say the US had “issues” with.

Goals of the IRA Relative to EV Adoption

As noted earlier, the goals of the Inflation Reduction Act were always about more than just climate change. They were, in no particular order, to:

  • Promote the manufacture and sale of affordable EVs by offering more targeted federal tax credits for buyers.
  • Incentivize US manufacturers to produce more electric vehicles, as well as the key components that go into them.
  • Foster innovation within the industry by removing manufacturer caps on eligible vehicles.
  • Extend the tax credits to the purchase of used electric vehicles, not just brand new ones
  • Apply income limits to that the incentives would be given to people who didn’t need them

Key Changes Brought About by the IRA for Electric Vehicles

The IRA has made it easier for people to purchase EVs by offering tax credits, but figuring out exactly how those tax credits work, and which EVs qualify, has become much more complicated.

Requirements for New Vehicles

In order to qualify for the federal tax incentive, the vehicles will have to:

  • Be assembled in North America. (the IRS has a tool which will tell you if yours was)
  • Have their batteries meet complicated battery requirements (more on that later).
  • Be priced at $55,000 or lower if it’s either a sedan or a hatchback. That price qualification increases to $80,000 or lower for SUVs, pick-up trucks, and vans.

To be clear, you still qualify for the federal tax credit if you purchase a vehicle at a higher price, it’s the MSRP that counts, not the final purchase price. The IRS has a list of qualified manufacturers that have vehicles that are currently eligible for a credit provided all other requirements are met.

Requirements for Batteries

Effective March 2023, new battery requirements fall into two broad categories: critical minerals and battery components.

When it comes to critical materials, in order for an EV to qualify for $3,750 of the federal tax credit, at least 40% of its battery’s source minerals has to be either: 

  • Mined or processed in North America
  • Mined or processed in a country with a free trade agreement with the US 
  • Recycled in the US

That percentage is determined by the value of the minerals and is scheduled to ramp up over time until it reaches 80% in 2027.

Meanwhile, in order for the same EV to qualify for the remaining $3,750 of the tax credit, at least 50% of the value of battery components must be manufactured or assembled in North America. This percentage will also ramp up over time until it reaches 100% in 2029.

And if that already sounds complicated enough, there is a further battery sourcing provision that tries to address “foreign entities of concern”. 

Starting in 2024, vehicles cannot qualify for the EV tax credit if they have any battery components at all that come from a foreign entity of concern. And starting in 2025, batteries can’t have any critical minerals from a foreign entity of concern to qualify.

At the moment, that provision seems to be aimed squarely at China and Russia, but the wording is such that, any time in the future, a country that acts in a way that the US doesn’t like can be added to the list quite easily.

Requirements for Used Vehicles

For the first time, starting in 2023, used electric vehicles qualify for the federal tax credit for the first time. This is a big deal since most car purchases, particularly at the lower end of the economic ladder, are for used cars. 

  • Used car purchasers qualify for a tax credit of $4,000 or 30% of sales price, whichever is the lower amount. 
  • The car must be bought from a dealership and be at least 2 years old.
  • The cost of the vehicle cannot exceed $25,000.
  • The used car tax credit can only be on the first resale of a vehicle. There is no tax credit for subsequent sales
  • There are no battery sourcing requirements for used vehicles.

Income Requirements for Buyers

As of 2023, there are now income caps to qualify for the Clean Vehicle Credit:

  • Joint filers must have an income of $300,000 or less.
  • Individual filers must have an income of $150,000 or less. 
  • For the used car EV tax credit, the income threshold is $150,000 for joint filers and $75,000 for a single filer.
  • Individuals can only apply for the federal tax credit once every three years.

Point of Sale EV Tax Credit

Starting in 2024, the consumer will be able to transfer their EV tax credit directly to the dealership, essentially turning it into a point-of-sale rebate. This is great for people who previously might not have benefited from the tax credit because of personal tax liability or who just didn’t want the hassle of claiming the tax credit themselves.

No More Manufacturer Cap

Previously, the federal tax credit was phased out for manufacturers that had sold 200,000 EVs within the United States. The Inflation Reduction Act EV tax credit removes that cap.

Which EVs Qualify for the Tax Credit

With all the hoops that auto manufacturers and car buyers are being asked to jump through, it’s no surprise that the list of vehicles that are eligible for the EV tax credit is fairly short for now. Many popular brands such as the Nissan LEAF Hyundai’s Ioniq 5 and the Rivian R1T, have not made the cut. 

While that may be disappointing for both the companies concerned and their would-be customers, it is also very deliberate. Remember, a key goal of the IRA was to jump start American manufacturing in these critical green technologies. 

And it seems to be working. 

According to Bloomberg NEF, as much as $52 billion worth of investments in US-based EV and battery manufacturing plants has already been announced. Some of that investment needs to kick in before other vehicles get added to the list.For now, though, you can check this fueleconomy.gov page find out which vehicles qualify for what credits. You’ll have to check back frequently as the list will undoubtedly change over time.

Final Thoughts

Overall, the IRA has brought huge changes to the electric vehicle market, most of them good, if a little complicated. Stay tuned for updates as we navigate through this essential information together.