Understanding the Inflation Reduction Act’s Electric Vehicle Tax Credits

Electric vehicle tax credits expanded significantly with the enactment of the Inflation Reduction Act. While the law expands the prior $7500 federal electric vehicle tax credits by lifting the 200,000-vehicle sales cap for manufacturers to be eligible, it also introduces new requirements for eligibility along with expanding the definition for clean vehicles. Now, vehicles fueled by fuel cell motors can also take advantage of the tax credit. The Inflation Reduction Act also introduces a tax credit for pre-owned electric vehicles. In this post, we highlight key eligibility requirements and share additional consumer resources.

The law refers to the credit for new vehicles as the Clean Vehicle Credit, which remains at up to $7,500. New eligibility criteria include the vehicle’s final assembly location, retail price caps, and battery sourcing requirements. Additionally, consumers must fall under specific income brackets to qualify for the tax credits. 

Consumers can verify the eligibility of vehicles they are interested in on the US Department of Energy’s website for the currently available tax credit. Users can also input a vehicle identification number (VIN) using the US Department of Transportation’s decoder to verify whether the vehicle was assembled in North America.

We anticipate that a new or updated list of eligible vehicles will be available as Inflation Reduction Act vehicle requirements phase in over time.

Income and price criteria for clean vehicle tax credits: New vs. pre-owned vehicles

The following table captures the eligibility criteria for consumer income and retail price limits for new (the Clean Vehicle Credit) and pre-owned clean vehicles.

Income and price eligibility criteria for tax credits that apply to new and pre-owned clean vehicles

Criteria	Existing program (until December 31, 2022)	Clean Vehicle Credit (January 1, 2023-December 31, 2032)	Pre-owned clean vehicle credit (January 1, 2023-onward)
Income limits	None	Credit is available only if modified adjusted gross income is $300,000 (for joint filers), $225,000 for head-of-household filers, and $150,000 for single filers.	Credit is only available if modified adjusted gross income is $150,000 (for joint filers), $112,500 for head-of-household filers, and $75,000 for single filers.
Price limits	None	Credit is available only for clean vehicles that are sedans and compact cars with a manufacturer-suggested retail price (MSRP) less than $55,000 and vans, trucks, and SUVs with an MSRP less than $80,000.	Credit is available only for clean vehicles that have a sales price of $25,000.

 

Phased eligibility requirements for new vehicles: Assembly, sales, and batteries

Going forward, the question is not only which new vehicles qualify for the tax credit but also when they qualify.

Phased eligibility requirements for new vehicles

Eligibility requirement	August 16, 2022 – April 17, 2023	April 18, 2023 – Onward
North America final assembly requirements	Yes	Yes
Sales cap	Yes	None
Battery requirements	None	Yes

 

Sales cap for manufacturers (until January 1, 2023). Cars are only eligible if they’re made by manufacturers that have sold under 200,000 electric vehicles and plug-in electric vehicles in total under the existing tax credit (GM and Tesla are ineligible until January 2023).

North America final assembly requirements (after August 16, 2022). Eligible electric vehicles and plug-in hybrid electric vehicles must be assembled in North America.

Battery requirements (starting April 18, 2023). Assuming all other criteria are satisfied, the battery requirements have two parts:

• $3,750 of the new credit is based on whether at least 40 percent of the vehicle’s battery critical minerals were extracted and processed in the US or countries with a free trade agreement with the US or were recycled in North America. This requirement increases over time, going up to 80 percent in 2027. Additionally, beginning in 2025, vehicles with critical minerals that were extracted, processed, or recycled by a foreign entity of concern are not eligible. Section 40207(a)(5) of the Infrastructure Investment and Jobs Act defines foreign entities of concern.
• The other $3,750 of the new credit is contingent on at least half of the vehicle’s battery components being manufactured or assembled in North America. This requirement also increases over time, going up to 100 percent in 2029.Additionally, beginning in 2024, vehicles with battery components that were manufactured or assembled by a foreign entity of concern are not eligible.

Clean Vehicle Credit battery requirements increase over time

Since the battery sourcing requirements become more stringent after they kick in, mining companies, battery manufacturers, and automobile companies are scrambling to establish facilities in the US to meet the new Clean Vehicle Credit requirements.

While the US Department of Energy currently does not list which vehicles will meet battery requirements and the other provisions that kick in on January 1, 2023, we anticipate they will do so going forward. In the meantime, the Office of the United States Trade Representative maintains a list of countries that have free trade agreements with the US.

Final things to note about the Clean Vehicle Credit: 

• It ends on December 31, 2032.
• It can only be claimed once per vehicle. The credit cannot be reclaimed when the vehicle is resold. Pre-owned clean vehicles may qualify for the pre-owned clean vehicle tax credit (see below).
• To take advantage of the tax credit, purchasers must currently claim it when they file taxes. Starting in 2024, the Internal Revenue Service (IRS) will establish a mechanism that will allow car buyers to transfer the credit to dealers at the point of sale so that it can directly reduce the purchase price. 
• We expect more guidance from the US Department of Energy and the IRS about the battery requirements before they are applied in 2023.

View the Treasury Department’s resource, Frequently Asked Questions on the Inflation Reduction Act’s Initial Changes to the Electric Vehicle Tax Credit, for more information on how to claim the credit.

The pre-owned clean vehicle tax credit  

The Inflation Reduction Act also established a pre-owned clean vehicle tax credit. Beginning in 2023, qualified plug-in and fuel cell electric vehicles will be eligible for federal tax credits up to $4,000 or 30 percent of the sales price, whichever is lower. Eligibility will be limited to the following income limits:

• $150,000 for joint filers
• $112,500 for head-of-household filers
• $75,000 for single filers
  

A pre-owned clean vehicle must meet the following requirements to qualify:

• Cost less than $25,000
• Be at least two years old
• Weigh less than 14,000 pounds

While details are sparse on how the information will be relayed to dealerships and whether the credit can be transferred at the point of sale, the US Department of the Treasury and the IRS are likely to release more information on the program before it launches in 2023.

Conclusion  

The Inflation Reduction Act has made some of the most significant changes to the federal electric vehicle tax credit since it was introduced in 2009. While the new law expands the eligibility criteria by lifting the sales cap, broadening the definition to include fuel cell electric vehicles, and introducing a pre-owned clean vehicle tax credit, it also establishes new criteria.

While we wait for guidance from the US Department of Treasury and the IRS, buyers must determine whether the vehicle they purchase fulfills requirements like the vehicle’s final assembly location, retail price caps, and battery requirements.

With many consumers eager to experience the many benefits of switching to an electric vehicle, GPI is working to help people navigate these sometimes-complex new offerings.

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