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Understanding Electric Vehicle Tax Credits

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EV Tax Credits

As tax filing season approaches, it's important to consider last-minute tax moves you can make to maximize your tax return. In 2022, that could mean buying an electric plug-in vehicle now or waiting until next year to maximize your return. As part of the Inflation Reduction Act of 2022, congress massively overhauled the Electric Vehicle Tax Credit. Changes included:

  • Modified which vehicles qualify for the credit
  • Limited credit claiming based on income
  • Expanded the credit to qualifying used cars

If you’re in the market for an electric vehicle, here’s what you need to know about the tax credit amendments.

Table of Contents
Understanding the Electric Vehicle Tax Credits
People Who Qualify for the EV Tax Credit
Cars that Qualify for the New Vehicle EV Tax Credit
Cars that Qualify for the Used Vehicle EV Tax Credit
Vehicles That No Longer Qualify for the EV Tax Credit
Don’t Let the Tax Credit Influence a Poor Vehicle Choice

Understanding the Electric Vehicle Tax Credits

The eclectic vehicle tax credit is a credit that you may qualify for if you purchased a plug-in electric car or truck. The credit exists to incentivize car owners to buy electric vehicles rather than gas powered vehicles.

The credit ranges between $2,500 to $7,500 for new vehicles (depending on battery capacity) and $2,500-$4,000 for used vehicles starting in 2023.

With gas prices increasing, going electric makes a lot of sense, and on Aug. 17, 2022, the Biden Administration signed the Inflation Reduction Act of 2022. Part of that legislation included an amendment to the Qualified Plug-in Electric Drive Motor Vehicle Credit. If you’re in the market for an electric vehicle, it's important to understand the new amendments. These are a few of the important components.

  • Starting on Aug. 17, 2022, the EV Tax Credit only applies to vehicles assembled in North America. Imported vehicles are excluded from the new tax credit.
  • The law is amended to exclude luxury vehicles. You can still claim the credit if you paid less than $80,000 for trucks, vans and SUVs. Sedans and other four-wheel vehicles must have a purchase price less than $55,000 to qualify.
  • Only income qualified households can claim the tax credit. You must have a modified adjusted gross income below $150,000 to claim the credit as a single person. Married couples filing jointly can have an income as high as $300,000 to claim the credit. A head of household filer can earn up to $225,000.
  • The law removed manufacturing quotas that limited you from claiming the credit if the company sold too many electric vehicles. Whether you bought from Ford, General Motors, or Tesla no longer matters. All that matters is whether the car was assembled in North America.
  • Starting in 2023, you can claim between $2,500-$4,000 when you buy a qualifying used plug-in vehicle. You and the vehicle must still meet the requirements laid out above. The credit is limited to a maximum of 30% of the vehicle purchase price.

Trying to figure out whether your next car purchase will qualify for the EV Tax Credit? We cover the details, so you can make your next purchase with confidence.

People Who Qualify for the EV Tax Credit

Not everybody can claim the EV Tax Credit. The Inflation Reduction Act limited the tax credit to income-qualified people.

  • If you are single, you can claim the credit if you have a Modified Adjusted Gross Income below $150,000.
  • Married couples can earn up to $300,000.
  • If you file as a head of household you can claim the credit if you earn up to $225,000.

Those who exceed these limits can’t claim the credit anymore. While the income limits are fairly high, some people no longer qualify to claim this credit.

Cars that Qualify for the New Vehicle EV Tax Credit

Vehicles now have to meet a stringent set of criteria to qualify for the EV tax credit. First, the purchase price must fall under $80,000 for trucks, vans and SUVs. Other cars need to cost less than $25,000.

Next, the car must have its final assembly in North America. The Department of Energy has a list of Model 2022 and 2023 vehicles that likely meet the North American assembly requirement.

But before you sign the document for a new car, run the VIN through the United States Department of Transportation VIN decoder. By entering the VIN, you can confirm whether the vehicle was assembled in North America.

Since the law removed a “qualified manufacturer” rule, you can confidently claim the credit regardless of manufacturer, as long as the VIN decoder confirms you can.

Cars that Qualify for the Used Vehicle EV Tax Credit

Starting Jan. 1, 2023, income qualified individuals can start to claim the EV Tax Credit on used cars. The credit is limited to $2,500-$4,000 (depending on battery size), but you can claim the credit if the car is more than two years old. The maximum credit is 30% of the purchase price of a vehicle. If you pay more than $25,000 for a used vehicle, you can’t claim the credit.

Most importantly, you can only claim the tax credit on the first transfer of a vehicle, and the tax credit can only be claimed once every three years per vehicle. A car with two previous owners won’t qualify for the EV Tax Credit. If the prior owner claimed an EV Tax Credit within the last two years, you won’t be able to get the credit.

Used cars also have to meet the final assembly in North America requirements. You can check whether the car meets the requirement by checking the United States Department of Transportation’s VIN decoder.

The law also created a battery manufacturing requirement. Starting next year, a certain percentage of the vehicle’s battery must be assembled or manufactured within North America. The thresholds are set as follows:

  • 2023: 50%
  • 2024: 60%
  • 2025: 60%
  • 2026: 70%
  • 2027: 80%
  • 2028: 90%
  • 2029 through 2032: 100%

No website has been released to track battery manufacturing and assembly, but this is expected to be released prior to January 2023.

Vehicles That No Longer Qualify for the EV Tax Credit

The EV Tax Credit still has allowances for motorcycles and other two- and three-wheeled vehicles, but those allowances close at the end of 2022. If you’re considering a plug-in electric motorcycle, now is the time to buy. However, the motorcycle must meet the North American assembly requirements.

Don’t Let the Tax Credit Influence a Poor Vehicle Choice

Sometimes well-advertised tax credits unduly influence people’s spending decisions. The mortgage interest deduction may have led some people to overbuy on their house and become “house-poor.'' In the same way, a tax credit could cause you to overbuy an electric vehicle.

Be sure that you’re not using a tax credit as an excuse to indulge your new car habit. Think through the cost to buy and the cost to own an electric vehicle. If it makes sense, then consider how to buy in the most tax-efficient way. But don’t buy just to lower your tax bill.

Editor: Claire Tak

The post Understanding Electric Vehicle Tax Credits appeared first on The College Investor.

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By: Hannah Rounds
Title: Understanding Electric Vehicle Tax Credits
Sourced From: thecollegeinvestor.com/41406/electric-vehicle-tax-credits/
Published Date: Wed, 16 Nov 2022 08:15:00 +0000

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