Congress recently passed the Inflation Reduction Act, which was signed into law by President Joe Biden.
The act has several provisions that aim to do everything from reducing prescription drug prices to helping lower the cost of health insurance. It also has provisions that both increase corporate taxes and boost the number of IRS employees in hopes of pursuing taxes owed to the federal government.
But one of the biggest parts of the law involves changes to the energy sector. The legislation includes various types of “green” tax credits, including credits for those who buy an electric vehicle.
But before you rush out and buy an electric car, there are some provisions in the law you may want to be aware of first. Knowing which tax credits are available can help you avoid wasting money by preventing you from making a foolish mistake.
What does the EV tax credit cover?
If you’re considering an EV, there is some good news: The IRA extends through 2032 a tax credit of up to $7,500 for buying an electric vehicle.
The tax credit applies to those who purchase all-electric vehicles or hybrid plug-ins, which are vehicles with both a gas engine and a rechargeable battery engine.
The tax credit covers a range of sedans as well as trucks and SUVs.The U.S. Department of Energy has a list of such vehicles on its website.
Laws passed more than a decade ago included a cap on the number of electric vehicles a company could sell before their cars would be ineligible for the tax credit. That 200,000-car limit has already been reached by companies like Tesla and General Motors.
However, the new law eliminates that threshold.
Which vehicles are not covered?
Critics of this new law say there are too many restrictions on which cars are eligible for the credit. In fact, prior to the law’s passage, the Alliance for Automotive Innovation estimated that 70% of vehicles previously eligible for the tax credit would lose that eligibility.
What has changed? First, the final assembly of the vehicles has to take place in the U.S. In addition, a portion of battery components must be manufactured or assembled in America.
In addition, trucks, pickups, and SUVs have to cost less than $80,000 in order to qualify for the credit. Electric cars only qualify if they cost less than $55,000.
Some electric vehicles should still fall under those upper limits. A Tesla Model 3, for example, has a starting price of around $47,000. Ford’s F-150 Lightning pick-up truck has a starting price that is around $40,000.
But any electric vehicle with a manufacturer's suggested retail price that exceeds the above-listed limits would be ineligible for the tax credit.
What about household-income limits?
A buyer’s income is also a factor when determining eligibility. Some buyers who make too much money could be ineligible for the tax credit.
A taxpayer who files as a single-payer with a modified adjusted gross income above $150,000 does not qualify for the tax credit. Married couples filing jointly have a limit of $300,000 before they become ineligible. And if you file as head of household, you also can’t qualify if you make more than $225,000.
These limits may seem high, but those who buy electric cars tend to have large incomes. For example, market research has found that owners of the Tesla X have an average income of more than $146,000 a year.
Overall, almost 80% of Tesla owners are expected to make at least $100,000 in income during 2022. Based on those demographics, it may not be difficult for a Tesla household to breach the income limit of eligibility.
What about used EVs?
What if you’re looking for a car in the used EV market? You still may be eligible for a tax credit.
Used electric vehicles now qualify for the tax credit, but there are some restrictions. First, be aware that the maximum tax credit for used vehicles is less than that of the credit for new vehicles. For used vehicles, it is $4,000 or 30% of the vehicle’s price, whichever is less.
You will also want to check on how old the vehicle is, as a used electric car needs to be at least 2 years old to qualify for the credit. The credit also is limited to used cars that cost no more than $25,000.
If you’re in the market for an electric vehicle, do your research before you go shopping, as you may be able to get a tax credit that could help you pay for a clean-running vehicle that can save you a lot of money on gas.
Remember, there are several rules that determine whether you and your new car are eligible for the tax incentives. You don’t want to be surprised when you find out your new car doesn’t make the cut.
It also might make sense to check and see whether buying an electric vehicle will help you save on car insurance costs, or if you will instead end up paying more. In short, don’t put blinders on and simply assume an EV tax credit will save you money. Be sure to look at the entire financial picture.
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