The Inflation Reduction Act (IRA) was signed into law by President Biden on Aug. 16, 2022. In addition to fighting inflation, one of the primary goals of this act is working to combat climate change. The legislation provides extensive incentives for clean energy, zero-emissions vehicles, energy-efficient buildings, and other “green” technologies. There is something for everyone in this bill; individuals may be particularly interested in updates to tax credits for electric vehicles. Let’s take a closer look to see how you might benefit.
Most taxpayers are already aware of the tax credits for electric vehicles as they have been around for quite some time. The IRA made some changes to the credit to increase opportunities for taxpayers to benefit. It is apparent the updates are aimed at encouraging electric vehicle sales in general. Most modifications to the Clean Vehicle Credit (formerly known as the New Qualified Plug-In Electric Drive Motor Vehicle Credit) are effective or start phasing in Jan. 1, 2023. One exception is that for vehicles purchased and delivered after Aug. 16, 2022, final assembly must occur in North America. The credit is extended through 2032.
The maximum credit for new vehicles remains at $7,500, but the computation has changed. Under the IRA, taxpayers can receive a $3,750 credit if the vehicle meets the “critical minerals requirement” and another $3,750 credit if it meets the “battery component requirement.” This is a much simpler computation than in the past.
The IRA removes the manufacturer’s cap on the number of vehicles that may qualify for the credit. Effective Jan. 1, 2023, an unlimited number of any qualifying vehicle model may be eligible for the credit. Manufacturers who had exceeded the limit on the number of credits will be eligible again starting in 2023. But manufacturers will need to comply with additional requirements related to the materials and manufacturing of the vehicles aimed at promoting “American-made” purchases. These requirements are being phased in over the next few years. The IRA imposes maximum limits on the manufacturer’s suggested retail price. For new vehicles, the price limit for vans, SUVs and pickup trucks is $80,000, and for all other vehicles the limit is $55,000.
For the first time, there is also now a Previously Owned Clean Vehicle Credit. This credit is equal to the lesser of $4,000 or 30% of the vehicle’s sales price. The sale price of the vehicle cannot exceed $25,000. It’s an exciting opportunity that we didn’t have before, and we can see that this update is attempting to broaden the market for electric vehicles in general.
The credit is claimed on an individual’s federal income tax return as a non-refundable credit. As a non-refundable credit, the amount of benefit is limited to the taxpayer’s income tax liability and in this case, the balance of the credit is not carried forward to future years. The credit is limited by the taxpayer’s modified adjusted gross income (MAGI). The new vehicle maximum MAGI for married filing jointly and surviving spouse filers is $300,000. It drops down to $225,000 for those filing as head of household and $150,000 for single filers. To qualify for the previously owned clean vehicle credit, the AGI limits are $150,000 for married filing jointly and surviving spouse filers, $112,500 for head of household, and $75,000 for all others. The buyer can use the lower MAGI from either the year of purchase or the year prior to the purchase. Starting in 2024, there will be an option to transfer certain credits to the dealership instead of waiting to file your tax return to benefit from the credit.
Given that some of the changes are phasing in and the fact that your credit calculation is dependent on your MAGI and tax liability, it is important to plan for the timing of your purchase. if you’re thinking about purchasing an EV, be certain to give your tax advisor a call for more specific details on how to maximize your benefit.
Note that while the focus of this article is personal use electric vehicle credits, there are also credits available for business and commercial use vehicles.
If you would like information on other vehicle credits, or if you have questions around the Clean Vehicle Credit, please contact your Rehmann advisor or Katie Sabo at [email protected].