The recently passed Inflation Reduction Act has restructured the Federal Electric Cars Tax Credit. The new program is here to inform you.
Electric cars enjoy increasing popularity due to various federal, state, and local government incentives. The federal government has provided tax credits as high as $7500 since 2008 to electric cars (EVs) and plug-in hybrid electric automobiles (PHEVs).
Congress passed the Inflation Reduction Act, which overhauled the federal electric cars tax credit system. These changes make it possible for buyers of electric cars that are not currently eligible to receive the tax credit to be eligible. They make it impossible for buyers of other electric cars to receive credit. A federal EV tax credit is now available to purchase used electric cars.
The new system is more complex than the previous one to determine if you qualify for a federal tax credit. New rules include new income caps for buyers that can earn credits and price caps on eligible vehicles. Additionally, there are regulations regarding where the battery components coming.
This guide will help determine if you and your car are eligible for the Federal Electric Car Tax Credit. It’s essential to consult a tax professional before you believe you are eligible for a tax credit.
The Inflation Reduction Act
The Inflation Reduction Act will govern new electric car purchases starting August 16. There is an exception for those who had a binding contract to purchase the vehicle before the law was signed.
What incentives are available?
New incentives for electric vehicles include a tax credit of up $7500 for new vehicles and $4,000 to purchase a used vehicle. Older vehicles were not eligible for this program. The tax credits you can receive will not become available until the end of 2023. You will receive the credits when you purchase your car. You will be able to lower the car’s price and finance less.
The new legislation does not affect any state, local, or utility incentives you might receive for purchasing an electric vehicle.
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Federal EV Tax Credit for New Car Buyers
The law allows new car buyers to receive the following:
- Tax credit up to $7,000.
- The credit will be received until the end of 2023 when you file your taxes next year. That will give the credit at the point where the sale is made, starting in 2024
- This act expires in 2032
- That applies to “clean cars”, allowing hydrogen fuel-cell vehicles and other vehicles to qualify
- It applies to all-electric or plug-in hybrid vehicles that comply with the act’s requirements.
The new program is designed to address some of the issues with the old program. That will give Credits to wealthy buyers who won’t buy an electric vehicle without credit. The act also ensures that the components and vehicles are made in North America. Materials are sourced from countries with free trade agreements with the U.S. and are not restricted by the federal government. That imposed many restrictions to prevent the bill from being passed.
Specific buyers may not be eligible to receive a tax credit. The Inflation Reduction law limits who is eligible for a tax credit. Single filers cannot have a modified adjusted income (MAGI) of less than $150,000. Also, Joint filers are subjected to a $300,000. Heads must have a MAGI lower than $225,000.
This rule assumes that buyers with incomes over the threshold can buy an EV, regardless of whether the tax credit is available. Therefore, no incentive is required.
Not All Cars Will Qualify
Because of how written legislation is, many restrictions limit which electric vehicle models will be eligible for credit. Credits for EVs are unlikely to be available starting January 1, 2023. Models will be eligible for credits again as the domestic EV market grows.
The battery size does not affect the amount of the EV credit. As long as the government has not placed any restrictions on EVs or PHEVs, all EVs, and other “clean” vehicles, such as hydrogen fuel cell vehicles, will be eligible.
The Federal Electric Car Tax Credit is available to those who purchase a new vehicle at less than $55,000. A new SUV, truck, or van must have a purchase price of $80,000 or less.
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All eligible vehicles have to be manufactured in North America. This limitation allows vehicles like the Ford F-150 Lightning Electric pickup, Lincoln Corsair Grand Touring PHEV, and Jeep Grand Cherokee4xe PHEV to be eligible for the credit. The credit also applies to the Chrysler Pacifica Hybrid, a PHEV built in Canada, and the Ford Mustang Mach-E, made in Mexico.
Currently, a handful of foreign automakers produce EVs in North America. The production of the Volkswagen ID.4 began outside the U.S., but it has been moved to Chattanooga in Tennessee. The IRS will use a vehicle’s VIN or identification number to determine the country of origin.
This restriction will apply to Kia, Hyundai, Genesis, Audi and Porsche, and other automakers that build their EVs in North America. The new credit program is similar to the Chicken Tax in the 1960s. That prohibits companies from importing pickups or cargo vans into America for electric vehicles.
The European Union already plans to challenge the new rules that it regards as discriminatory trade barriers.
Notably, will be denied the credit for Tesla’s or Toyotas made in North America between 2022 and 2023. However, in 2023, that will grant that only for part of the amount. The original EV credit program’s 200,000-unit limit remains in force until 2022. They’ll once again be eligible when the calendar turns to 2023.
Do you think it’s great? I can get $7,500 back in 2023 on any North American-made electric vehicle I choose to purchase, provided I don’t exceed the income limit, and it isn’t too expensive.
Not so fast, nope.
The location of where the battery components are manufactured and the source of the raw materials used to produce the battery will determine how much credit you receive starting in 2023. This credit can be up to half off, or $3,750. Let’s start with battery component manufacturing.
20% of the components for an EV battery must be made in the United States or from another country with a free trade agreement. This requirement will also apply in 2023. This percentage will increase to 60% by 2024 and 2025.
It will be 70% in 2026 and 80% by 2027, reaching 90% in 2028. It also must be entirely in the United States by 2029 (or in a country with a free trade agreement).
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Source for Raw Materials
The biggest hurdle for EVs will be the requirement that raw materials used in the batteries be recycled in the United States or sourced from a country with a U.S. Free-Trade Agreement. The conditions must be met by 40% of the EVs in 2023. This number will rise steadily to 80% in 2027.
Furthermore, the components of the batteries cannot be imported from any country. The current list includes Iran, China, North Korea, and North Korea.
Today’s electric vehicles cannot meet material sourcing and production requirements.
Automakers will have difficulty developing supply chains that comply with strict sourcing requirements over the next few years. That means that it is likely that no EVs will be eligible for the $7,500 incentive in the next few years. The restrictions will not only ensure a strong supply base in America, but they should also reduce dependence on foreign suppliers over the long term.
Federal Electric Cars Tax Credit for Used Car Buyers
A federal tax credit is now available for buyers of pre-owned vehicles. However, it has a few restrictions.
- A tax credit of up to $4,000, or 30% of the transaction value, depending on which is lower.
- You must be at least 2 years of age
- Dealers who buy the car to resell it are not eligible
- Minimum purchase price of $25,000
- It cannot be used more than once during a vehicle’s lifetime
- The dealer must accept the sale. Private-party sales are forbidden
- They are retroactive and begin January 1, 2023
- Only for individuals and not for businesses
Also, purchasers must meet income requirements. If you file jointly, your modified adjusted gross income cannot exceed $150,000. Single filers may earn as much as $75,000 if they file under the head-of-household category.
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Frequently Asked Questions About Electric Cars Tax Credit
What if I bought an EV before August 16?
You can still claim credit for any vehicle you bought eligible under the Federal Electric Vehicle Tax Credit program before August 16. The old rules allowed manufacturers to produce EVs that have not sold more than 200,000 fully electric or plug-in hybrid vehicles. You could use this credit to reduce your tax bill by $7500.
The old bill did not provide a program for used cars, so there was no tax credit for purchasing an electric vehicle.
What if I had a purchase agreement signed before August 16?
The IRS states that if there were a “written binding agreement” before August 16, the old rules would apply regardless of whether or not the vehicle is yours. Vehicle purchases are exempted from income, price, or origination restrictions.
A signed purchase agreement is more than a deposit on an EV maker’s website. A significant deposit or down payment is required in most states to make the contract bindings.
What if I buy (or agree to) an electric vehicle before 2022?
You may be eligible for the $7,500 tax credit if you buy a new EV between August 16 and 2022. Any EV you purchase is subject to the North American Production Rule (but not the material sourcing or battery production rules).
The old program’s 200,000-unit rule remains in effect, so EVs from GM, Toyota, and Tesla buyers won’t be eligible for any federal tax credit in 2022.
How many times can the electric vehicle tax credit be claimed?
What is the maximum number of times you can claim the Electric Vehicle Tax Credit? Only one qualifying vehicle can claim the credit. You must claim the tax credit within one year of purchasing and using your fully electric, plug-in hybrid, or fully-electric two-wheeler vehicle.
How can we claim the electric cars tax credit?
To calculate your credit for qualified plug-in electric drive motors that you put into service during the tax year, use Form 8936. To calculate your credit for particular two- and three-wheeled qualified plug-in electric vehicles, use Form 8936.
What does an electric car do for you?
Electric cars: Tax on the benefits in kind
The benefit in kind tax (BIK) is currently exempt from tax for hybrid vehicles that emit between 1 and 50g/km and pure electric ranges of more than 130 miles. The electric car tax rate on BIK will rise to 1% in 2021/2022 and 2% in 2022/2023.
What is the working principle of electric cars tax credits?
A tax credit is a dollar-for-dollar decrease in the income tax that you owe. If you owe $1,000 in federal taxes but are eligible to receive a $1,000 credit, your net liability will drop to zero.
What documentation is required for EV credit?
Form8936 calculates the credit for qualified plug-in electric drive motors you put into service during the tax year. You can also use Form 8936 for credit calculations for certain two-wheeled, plug-in electric vehicles.
What happens if I don’t owe any taxes?
The ITC cannot be claimed more than once per tax return. Any unused credits will be carried over to the next tax season. If you had $7,000 in solar tax credits but owed $6,500 tax, you would be responsible for $0. The $500 remaining would then be rolled over to the following tax year.
How are electric car benefits calculated?
It is calculated using the vehicle’s list price, VAT, optional extras, and delivery fees. An electric vehicle cannot emit more than 50 grams of C02 per km to qualify for the lowest company car BiK rate of 1%.
Are electric cars tax credits taxable income?
Some benefits may be taxable, while others are not. Notably, the tax credit is not taxable income. Universal credit is also not included in this list. We have a separate list that lists state benefits, which we tax.
Is the EV credit refundable?
This credit is non-refundable. Any credit you don’t use won’t be refunded. Credit cannot carry over to the following calendar year. These conditions are required to qualify for qualified credit for plug-in electric vehicle credit: Your vehicle must be yours.