The United States Senate has passed a long-awaited spending bill. The Inflation Reduction Act aims to tackle climate change, healthcare, taxes, and more. In it are huge changes to the EV tax credit, including the fact that it can be applied at the point of sale instead of at tax time. But it also makes big changes to which cars do and do not get a credit, so let’s get into it.
On August 7, the Senate passed the Inflation Reduction Act of 2022. It comes after Senators spent the weekend voting on amendments to the monster 755-page legislation. The bill now heads to the House of Representatives, where it’s expected to pass. Then it lands on President Joe Biden’s desk. A statement from President Biden indicates that he intends on signing it, and that could happen later this week.
[Author’s Note: You can read the full legislation linked here or in mentions of the Act.]
As Electrek reports, the bill–a scaled down version of the Build Back Better Act with a new name–authorizes $369 billion in spending on fighting climate change, down from $550 billion. That $369 billion breaks down, in part, like this (from Electrek):
This climate spending includes $60 billion for solar panel and wind turbine manufacturing (and $30 billion in credits for new projects), $60 billion for disadvantaged communities that bear the brunt of climate impacts, $27 billion for clean tech R&D, $20 billion to reduce agricultural emissions, $5 billion for forest conservation, and $4 billion for drought funding in Western states.
There are also credits for home upgrades like rooftop solar, battery packs, heat pumps, induction stoves, and more. But I have a feeling that you’re here because you’re interested in one of the other big parts of the bill: The EV tax credit.
The short version is that if the bill gets signed into law the $7,500 EV tax credit would be extended an entire decade. Used electric cars priced $25,000 or less would also be eligible for an EV tax credit of up to $4,000. However, there are a lot of caveats and changes. Here’s how we got here in the first place.
Currently, the U.S. Department of Energy states:
All-electric and plug-in hybrid cars purchased new in or after 2010 may be eligible for a federal income tax credit of up to $7,500. The credit amount will vary based on the capacity of the battery used to power the vehicle. State and/or local incentives may also apply.
This is how buying an EV or plug-in hybrid has been for a while. But it’s not really as simple as the government’s blurb makes it out to be.
Currently, if you buy an electric car, you still have to pay full price. Come tax time, you can claim a tax credit of up to $7,500. “Up to” is the term to pay attention to, there. The amount depends on two main factors: how much tax money you owe and the size of the battery in the vehicle.
Say that you buy a Nissan Leaf.
It’s a vehicle that’s currently eligible for the full $7,500. However, let’s say that you owe Uncle Sam only $1,000 at tax time. Well, under how the credit is currently structured, your credit is just $1,000. The credit isn’t refundable, so you won’t be getting $6,500 in the bank. And it can’t be applied to next year’s taxes.
One of the biggest EV credit changes proposed in the Inflation Reduction Act is that credits are applied at the point of sale. That means that you don’t have to pay full price then wait until tax time to get some or all of the credit. Instead, the credit is applied at the point of sale, which means that you pay a lower upfront price.
Another big change is the removal of the manufacturer production cap. Currently, the full credits can be applied to only 200,000 cars per manufacturer. That’s a cap that GM, Tesla, and Toyota have exceeded, with other manufacturers also on their way. After the cap is hit, the credits to customers are then reduced by 50 percent every six months until they’re phased out. The Department of Energy notes that GM’s EVs haven’t been eligible for the tax credit for over two years.
With the Inflation Reduction Act, the cap is lifted, allowing full credits for eligible vehicles from popular automakers.
There is a catch to that, and it’s that vehicles now have caps on their MSRP. That’s up to $55,000 for cars and up to $80,000 for SUVs and trucks, Above t hose, and there’s no credit. There are additional requirements that eligible vehicles must be built in North America. And as CNBC notes, how an EV’s battery is made will also impact if it’s eligible for a credit:
As written, the law requires that 40% of battery components be sourced from factories in the U.S. or its free-trade agreement partners; that batteries be U.S. made by 2029; and that Chinese components and minerals be phased out beginning in 2024.
Right now, it is not clear if any U.S. battery plant can meet the law’s requirements.
Based on these new rules, manufacturers with currently phased-out credits may now get the full up-to $7,500 credit. That means that, depending on how those batteries are made, you could get up to $7,500 on the hood for a Chevrolet Bolt or a Tesla Model 3. However, vehicles like a Tesla Model S, Model X, and higher trims of the Model 3 will be ineligible because of their MSRP.
And because of the requirement that eligible vehicles have to be built in North America, a large number of vehicles that were eligible before will not be eligible in the future. Those vehicles would include the Toyota Prius Prime, Hyundai Ioniq 5, BMW i4, Subaru Crosstrek Hybrid, Volvo S90 Recharge, and many more.
A Reddit user has compiled a list of what this would look like, and a bunch of vehicles may be losing tax credits. And the list isn’t accounting for how the batteries are made in otherwise eligible vehicles.
The requirements do not stop there. In addition to the vehicle MSRP caps there is also an income cap. That cap is $150,000 for a Single-filing taxpayer and $300,000 for those filing jointly. For used vehicles, the cap is $75,000 and $150,000, respectively.
If signed into law, most provisions go into effect on January 1, 2023. However, one important provision — the location of a vehicle’s assembly — goes into effect after signing. That means if you want to take advantage of current tax credits on a vehicle built outside of North America, you’ll want to get a purchase agreement as soon as possible.
Being able to take advantage of the tax credit right away is a huge win. Now, EVs can be more affordable for more buyers.
For example, with the Bolt now having a starting price of $26,595, this means that you may be able to score one for under $20,000. Another win is allowing popular brands to take advantage of credits. However, a surprising number of other vehicles will no longer be eligible for tax credits. Some of those vehicles aren’t even luxury vehicles. Still, this seems to be a win overall, but we’ll have to wait a little longer for further details on how this will unravel.