What the new tax credit rules will mean if you buy an electric car

From the November 2022 issue Car and driver.

As of August 15, about 30 new electric vehicles and 42 hybrids were eligible for federal income tax credits. On August 16, those numbers dropped to eight and 10. Starting January 1, 2023, the number of qualified electric vehicles will increase to 11. These changes are the result of the Inflation Reduction Act, which President Joe Biden signed into law on August 16.

Only one norm of the law came into force right away, and it was a big one. As of that date, only cars assembled in the U.S., Canada and Mexico are eligible for the $7,500 credit, eliminating nearly three-quarters of eligible cars.

Here’s what we’ll see in early 2023 and beyond:

Change of qualification

The limit of 200,000 eligible EVs per automaker is lifted, making General Motors and Tesla vehicles eligible again. However, the new price caps for eligible vehicles — $55,000 for cars, $80,000 for trucks and SUVs — exclude the GMC Hummer and several Teslas (Model S and X, higher-spec Model 3).

Another change is that the amount of the tax credit does not depend on the size of the battery. If your electric vehicle or plug-in hybrid has a battery capacity of at least 7.0 kilowatt-hours, you can qualify for a full scholarship of $7,500. First time used cars are accepted when purchased from a dealer. Now they get a loan of up to 30 percent, up to a maximum of $4,000. A used electric vehicle or plug-in hybrid must cost no more than $25,000 and be at least two model years old.

Another bonus kicks in in 2024: You can get a new car loan when you buy it instead of waiting until tax season. This means that $7,500 can serve as a down payment.

From local sources

Many changes are related to the production of electric vehicles. In addition to the final vehicle assembly provision, half of the $7,500 credit is contingent on at least 40 percent of the critical materials in the battery being sourced or processed in the US or countries with which we have free trade agreements. Materials recycled in North America also count. The test is gradually increasing to 80 percent in 2027.

To promote local battery assembly, the remaining $3,750 is based on a requirement that at least 50 percent of the cost of battery components be manufactured or assembled in North America. In 2029, this horror will gradually increase to 100 percent.

Starting in 2024, if any battery components are manufactured in a “foreign facility of concern,” meaning China, Iran, North Korea, or Russia, the vehicle will be disqualified. The same rule will apply to sources of critical materials in 2025.

Mo’ money, without loans

There is also an income ceiling for the loan. For joint filers or surviving spouses, it’s $300,000; for the head of the household – $225,000; and for individual and separate filers, the limit is $150,000. Adjusted gross income limits for used car loans are double those for new cars.

Overall, these new “clean vehicle” credit provisions are a mixed bag of industrial policy, social engineering, and EV promotion. Encouraging the purchase of trucks by increasing their prices hardly makes sense when trucks use more electricity, which comes mostly from CO2-producing power plants. But domestic automakers are overwhelmingly heavy trucks, so this is another step for them.

These regulations, along with stronger battery regulations, will encourage more EV assembly and parts in our automotive market. And battery regulations will help us develop local sources to supply future waves of electric vehicles. Speeding up the issuance of mining permits and environmental impact statements could be even more beneficial, but they are missing from the bill.

In the short term, the law is likely to dampen sales of electric vehicles — at least until more manufacturers set up shop in North America. We’ll see how it goes in a few years.