On August 16th, 2022, U.S. President Joe Biden signed the Inflation Reduction Act into law. The $750 billion health care, tax, and climate bill aims to curb the highest inflation rate in 40 years (inflation increased to 9.1% in June 2022). The bill also includes new federal tax credits for consumers who buy electric and hybrid plug-in vehicles. Today, we explore how the new Inflation Reduction Act EV tax credit rules could save you up to $7,500 on your federal taxes.
How Do Federal Tax Credits Work?
Firstly, it’s important to clarify what a federal tax credit does. A federal tax credit does not necessarily put money in your pocket – instead, it reduces the amount you pay on your federal taxes.
For example, let’s say you expect to pay $13,000 in federal taxes in 2022. If you qualify for a federal tax credit of $5,000, you would instead pay $8,000 in federal taxes.
While the net result is still more money in the bank, it’s coming from paying less federal taxes – not necessarily cutting a check from Uncle Sam.
How Is the New Inflation Reduction Act EV Tax Credit Different?
The Inflation Reduction Act makes quite a few changes to previously existing federal tax credit rules that you should know about. Some of the most important changes include:
- Restricting EV and hybrid federal tax credit to North American-made vehicles, eliminating many vehicles that previously qualified for a federal tax credit.
- Putting new price thresholds on eligible vehicles. To qualify, Sedans, hatchbacks, wagons, and other smaller cars must be $55,000 or less. Pickup trucks, SUVs, and vans are cut off at $80,000.
- Removing a 200,000 vehicle sales cap on tax credits starting in 2023. In other words, the new tax credit extends to eligible vehicles even if more than 200,000 are sold (starting in 2023).
- Offering a new tax credit of up to $4,000 on used EVs after December 31st, 2022.
- Restricting the full tax credit on new EVs to vehicles with battery minerals either sourced from countries the U.S. has a free trade agreement with or that are recycled in North America. In other words, cars with batteries sourced from ineligible countries may still be eligible for a federal tax credit, but not the full $7,500.
Should I Wait to Buy A New EV Because of the Inflation Reduction Act?
These sweeping changes stand to impact many drivers. Although parts of the bill won’t go into effect until 2023, the effective date for many restrictions is August 16th, 2022 – the day it was passed into law.
The government is still working to finalize all makes and models that are (or are not) eligible for the Inflation Reduction Act EV tax credit. If you have your eye on a new EV or hybrid that currently qualifies, buying it now may be wise in case it becomes ineligible later down the line. Alternatively, buyers who want a used EV may want to wait until 2023, when the used car changes go into effect.
How Do I Know If My Car Is Eligible for the Inflation Reduction Act EV Tax Credit?
According to the U.S. Department of Energy, the following makes and models may be eligible for a federal tax credit under the Inflation Reduction Act:
|Model Year:||Vehicle:||Additional Information:|
|2022||Chevrolet Bolt EUV||Manufacturer sales cap met|
|2022||Chevrolet Bolt EV||Manufacturer sales cap met|
|2022||Chrysler Pacifica PHEV|
|2022||Ford Escape PHEV|
|2022||Ford F Series|
|2022||Ford Mustang MACH E|
|2022||Ford Transit Van|
|2022||GMC Hummer Pickup||Manufacturer sales cap met|
|2022||GMC Hummer SUV||Manufacturer sales cap met|
|2022||Jeep Wrangler PHEV|
|2022||Lincoln Aviator PHEV|
|2022||Lincoln Corsair Plug-in|
|2022||Tesla Model 3||Manufacturer sales cap met|
|2022||Tesla Model S||Manufacturer sales cap met|
|2022||Tesla Model X||Manufacturer sales cap met|
|2022||Tesla Model Y||Manufacturer sales cap met|
|2023||Bolt EV||Manufacturer sales cap met|
|2023||Cadillac Lyriq||Manufacturer sales cap met|
|2023||Mercedes EQS SUV|
Makes and models listed with “manufacturer sales cap met” are not eligible until 2023.
Some of these makes and models are also constructed outside North America, making them ineligible. To see if the car you want is eligible, search the Vehicle Identification Number (VIN) on the National Highway Traffic Safety Administration (NHTSA) VIN Decoder. The VIN Decoder will let you know if final assembly occurred in the U.S. (making the car eligible) or elsewhere (making it ineligible).
Find the NHTSA VIN Decorder Here.
What About Cars Qualified Under the Previous EV Tax Credit Rules?
According to the U.S. Internal Revenue Service (IRS), buyers who entered a contract to purchase a previously qualified vehicle before August 16th can still claim a federal tax credit under the previous EV rules. This applies even if they could not possess the car until after August 16th (due to construction delays or delivery times).
To take advantage of the new tax credit on cars purchased between August 16th, 2022, and December 31st, 2022, the final assembly must have occurred in the U.S. Otherwise, the rules in effect prior to the Inflation Reduction Act will apply.
In the long run, the Inflation Reduction Act EV tax credit stands to increase the number of EVs made in North America and give buyers of used and new EVs a significant financial incentive to purchase an electric or hybrid car. We hope this piece has clarified the ins and outs of the Act. Stay tuned for more car news, tips, and tricks in the near future!