Update as of January 5, 2023: Due to the complexity of the EV tax credits announced in August of 2022, the Treasury Department is now delaying proposed guidance on sourcing EV batteries until March 2023. While the other restrictions, including income caps and retail prices, went into effect on January 1st, the gap in guidance for batteries means some EVs that would have been excluded are now eligible.
When the Inflation Reduction Act of 2022 (IRA) was signed into law on August 16, 2022, the rules governing the federal tax credits for electric vehicles (EV) changed substantially. It became much more complex for new car buyers. The new credit is called the Clean Vehicle Credit (CVC) and replaces the New Qualified Plug-in Electric Drive Motor Vehicle (NQPEDMV) Credit.
The CVC will allow taxpayers to claim a tax credit up to $7,500 for qualifying new clean vehicles. Meaning, a vehicle:
- With at least four wheels and a GVW of less than 14,000 pounds
- Propelled, to a significant extent, by an electric motor that draws power from a battery, with no less than 7kw hours of capacity, and is cable of being charged externally
- Sold to the consumer by a US licensed dealer that meets certain manufacturing requirements sourced to the US and/or North America
This definition will cover many fully electric, hybrid, or alternative energy vehicles. These new tax credits are active through the end of 2032 and have rules around new and used car purchases.
Many changes to the tax credit rules are designed to support US and North American vehicle manufacturers and electric vehicle battery producers. Additionally, it eliminates the sales cap that previously limited Tesla and General Motors (Buick, Chevrolet, Cadillac, and GMC) vehicles from claiming the tax credits. With the four-wheel requirement, it does eliminate tax credits for motorcycles.
To help make clean vehicles more accessible to the average American, the CVC will allow for advance credit payments at the time of purchase. However, if you do not qualify for the tax credit when filing your tax return, you should be prepared to repay any advance payment you received.
Further administrative changes are anticipated as the marketplace and the IRS adjust. As more information becomes available, we will update this article.
The IRA also included tax credits for the purchase of used vehicles.
New Purchases Before August 16, 2022
If you purchased a vehicle and took possession of the vehicle before August 16, 2022, you will be subject to the old rules under the New Qualified Plug-in Electric Drive Motor Vehicle (NQPEDMV) tax credit. A primary factor in determining your maximum tax credit will be if your potential vehicle has already hit the 200,000 sales threshold. The US Department of Energy has a great website to help you determine the status of various vehicles.
If you entered a binding contract to purchase a vehicle and did not take possession of the vehicle before August 16, 2022, you will still be able to claim tax credits based on the NQPEDMV rules. You should check out the same Department of Energy website to determine the status of your vehicle.
If you do not know if you have a binding contract at this point, you will probably not fall into this category. The IRS sees a binding contract as a written agreement enforceable under state law that does not limit damages to a specified dollar amount.
New Purchases after August 16 and Delivery Before December 31, 2022
If you purchased (or entered a binding contract to purchase) a vehicle after the IRA and plan to take possession before the end of the year, you may elect to claim the tax credit under the NQPREDV tax credit rules. To qualify, your purchased vehicle must still meet the final assembly requirements.
New Purchases on and after January 1, 2023
For purchases in January, all the new CVC rules take full effect. The IRS will develop additional guidance to administer this revised tax credit program by December 31, 2022. As we discuss the various requirements of the new tax credit program, we will move from least complex to the more complex items.
You must meet all the requirements to avoid repaying the advance tax credit. The credit is up to $7,500 based upon two individual credit provisions of $3,750 each.
Annual Taxpayer Income Limitations
To qualify for the new CVC, taxpayers’ Modified Adjust Gross Income (MAGI) must not exceed certain levels and do not have any phase-out provisions. If your MAGI exceeds these limits by $1, you lose the tax credit benefit.
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For this tax credit, MAGI is determined by taking your Adjust Gross Income (AGI) on your tax return and adding any excluded income from Guam, American Samoa, Northern Mariana, Puerto Rico, or foreign sources. These add-back items only apply to certain taxpayers, and most taxpayers will be able to use their AGI to determine income limits.
The law allows you to use your lower MAGI from the year you use the tax credit or the previous year. As an example, if you were to look to claim a tax credit on your 2022 tax return, you would look at your MAGI for both 2021 and 2022 and take the lower number.
MSRP Retail Price Limits
To qualify for the CVC, the manufacturer’s suggested retail price (MSRP) cannot exceed certain thresholds, eliminating some “high-end” and “luxury” vehicles. The applicable limit for vans, sport utility vehicles, and pickup trucks is $80,000. All other vehicles are limited to $55,000. There are no phase-outs, so this is a hardline in consideration for the tax credit.
Considering these new MSRP limits, it is unclear how auto dealers will shift their vehicle offerings. Currently, Kelly Blue Book (KBB) estimates the average electric vehicle is selling for $66,000, while hybrid/alternative energy vehicles’ average sales prices were around $39,000 in June 2022.
Since the COVID pandemic, supply chain issues have plagued the auto industry’s pipeline, leading to sales over MSRP in many areas and significant delivery delays. Recent inflation pressure may lead to increased prices to cover rising costs or additional capital investments to comply with the new assembly requirements.
Critical Minerals, Battery Components, and Final Assembly Requirements
The most complicated elements of the CVC are the requirements around manufacturing based in the US, US trade partners, and North America. The $7,500 credit is made up of two components: the critical minerals and battery components requirements.
Critical minerals requirements refer to the motor’s battery that must be made with components from the US, or a country with which the US has a free trade agreement, or from materials recycled in the US. The batteries used in vehicles sold in 2022 through the end of 2024 must be produced with 40% of US-sourced materials and increases up to 80% by the end of 2026.
Similarly, battery components must be sourced from a manufacturer, or assembler, in North America. The batteries used in vehicles sold in 2022 through the end of 2023 must be produced with 50% of US-sourced materials and up to 100% by the end of 2028. Additionally, the vehicle’s final assembly must be completed in North America.
Depending on how manufacturers respond to these requirements, dealerships might be selling similar models of vehicles, but due to manufacturing locations or components, only one of them would qualify for the tax credit.
The US Department of Energy has compiled a list of vehicles that may qualify for the new tax credit through the rest of 2022 and 2023. To further document and identify the origin of manufacture, the IRS and Department of Energy recommend using the VIN Decoder website from the National Highway Traffic Safety Administration (NHTSA).
Managing Your Tax Liability with Aldrich
Many states are offering additional incentives for electric and hybrid vehicles outside of these tax updates. In addition, local utility companies may also provide incentives and rebates for related home charging equipment. If you’re interested in purchasing an EV or maximizing the CVC, fill out the form below to contact author and expert, Matthew Kanter, CPA.
MEET THE AUTHOR
Matthew Kanter, CPA, CFP®
Aldrich CPAs + Advisors LLP
Matthew Kanter joined the firm in 2017 with five years of experience working with individuals and small businesses at a small accounting firm in the Portland, Oregon area. Here at Aldrich, Matthew assists with tax compliance and planning for individuals, high net-worth clients, and estates and trusts. Matthew enjoys empowering his clients to focus on... Read more Matthew Kanter, CPA, CFP®
- Certified Public Accountant
- High-net-worth individuals
- Strategic tax planning and compliance