The recently enacted Inflation Reduction Act covers a lot of ground, from reducing some drug prices to imposing a minimum corporate income tax. As much as anything, the legislation provides incentives for green energy. That includes substantial new tax breaks for consumers seeking to buy an electric car or truck.
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The legislation is complicated, with the overall tax sections alone running to more than 300 pages. But here are some of the key pointers for those who might want to buy a green vehicle:
There’s a $7,500 tax benefit
Vehicle manufacturers have been scrambling anyway to unveil more electric models, but the legislation provides another incentive, both for plug-in and fuel-cell models. Purchases can be subsidized with federal tax credits worth $7,500 for buyers who qualify, on vehicles that qualify.
Credits are dollar-for-dollar reductions in a person’s tax bill. That makes them more valuable than deductions, which reduce the size of a person’s taxable income.
The new tax-credit rules are set to last through 2032. The effective start dates aren’t so easily summarized, hinging on several factors including vehicle components.
In general, the new tax credits will apply to vehicles placed in service after Dec. 31, 2022, with a number of exceptions, said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting.
Credits won’t be available to everyone
The tax breaks will be limited by household income (specifically, modified adjusted gross income) and by vehicle prices (the MSRP or manufacturer’s suggested retail price).
Buyers can qualify if their incomes aren’t too high. The limits are $150,000 for singles, $225,000 for heads of household or $300,000 for married couples filing jointly.
As for pricing, credits will be available on cars and trucks carrying MSRPs up to $80,000 for vans, SUVs and pickup trucks, or up to $55,000 for all other vehicles. In other words, the credits are focused on relatively modest-priced cars and trucks as opposed to, say, the $249,900 Sapphire “super sports sedan” coming from Lucid Motors, which builds its electric cars at a gleaming new factory in Casa Grande, Arizona.
It’s important to note that these income-eligibility and pricing figures are “cliffs” rather than phase-in amounts, Luscombe said. That means “if you go over the limits by $1, (the credit) is gone completely.”
The income limits and pricing caps exclude some market segments “but leave the vast majority of vehicles and drivers eligible,” noted the Zero Emission Transportation Association in a recent report.
But strict North American and domestic content and assembly requirements, explained a bit below, “will have more severe implications for vehicle eligibility,” the group said.
Vehicles need hefty domestic content
In addition to household income and pricing, eligibility for a tax credit also will hinge on how a particular car or truck was built.
“The new credit requires final assembly of the vehicle in North America and also phases in sourcing requirements for critical components of the vehicles and battery systems,” according to a Wolters Kluwer summary.
More specifically, the legislation mandates that qualifying vehicles, after 2023, generally can’t include battery components made or assembled by a foreign entity, according to the ZETA analysis. After 2024, they can’t include critical minerals from foreign sources.
These restrictions essentially mean a “hard ban on Chinese EV parts and components,” according to the ZETA analysis. “Shifting our supply chains away from Asia to comply with these credit requirements will not be easy for the EV industry.”
There will be more tax-favored choices
These constraints notwithstanding, buyers eventually should have many more electric vehicles to choose from and on which to claim a tax credit, as caps on manufacturer sales will go away. Those limits have made tax credits unavailable on vehicles made by companies that have sold more than 200,000 electric units.
“Tesla, Toyota and (General Motors) had already passed the 200,000 sales cap, and Ford was well on its way, meaning that consumers were unable to purchase the vast majority of market-available electric vehicles and still receive the consumer credit,” wrote ZETA’s policy team in the group’s report.
With the new legislation, tax credits again will be available on cars and trucks produced by some of the biggest manufacturers and earliest innovators.
Tax breaks will extend to used vehicles
For the first time, the new legislation allows a tax credit on used electric cars or trucks, although it’s less valuable than the credit on new vehicles. This one is worth $4,000 or 30% of the vehicle’s cost, whichever is less. Also, the used-vehicle credit caps the price of eligible cars and trucks at $25,000, the ZETA report said.
This provision isn’t subject to the same domestic or North American sourcing requirements as for new EVs. But the tax break is more restrictive on buyer income eligibility. The top allowable MAGI limits are $75,000 for singles, $112,500 for heads of household or $150,000 for joint filers.
Considering that roughly two in three car buyers generally are shopping for used vehicles, this tax break will help expand the market.
“The credit for used EVs will play a critical role in increasing access for a broad range of customers,” ZETA predicted.
But whether on new or used electric vehicles, there’s no provision in the new legislation allowing consumers who lease a car or truck to claim a tax credit.
You might qualify for a charging credit
The Inflation Reduction Act also is loaded with incentives to spur greater use of energy-efficient items in homes, from windows to air-conditioning systems. One provision tied to electric vehicles is that the legislation allows for a credit of up to $1,000, or 30% of the cost (whichever is less), for individuals who want to install charging equipment.
There’s a census-tract requirement on this tax break that essentially limits eligibility to infrastructure installed in non-urban and lower-income areas.
Still, the provision will encourage many electric-car owners to install charging equipment in their homes, ZETA predicted. A separate commercial tax break will spur more even charging stations, “enabling (businesses) to attract and retain customers and employees alike,” the group said.
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