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What Does the EV Tax Credit Overhaul Mean for Car Shoppers?

toyota-bz4x-2023-18-charging-cable-charging-port-exterior-red-suv 2023 Toyota bZ4X | Cars.com photo by Melissa Klauda

Editor’s note: This story was updated Aug. 29, 2022, with further details on the timing of the credit.

Most new electric vehicles on sale lost eligibility Tuesday to qualify for up to $7,500 in federal EV tax credits when President Joe Biden signed the comprehensive climate, health care and tax law — the Inflation Reduction Act of 2022 — revising the program. Effective immediately is a requirement that the vehicles be assembled in North America, and most currently are not. The overhaul of the program adds, however, the first-ever credit for buying a used EV, worth up to $4,000, and caps qualifying vehicle prices and buyer incomes.

Related: What to Know Before Purchasing an Electric Vehicle: A Buying Guide

Additional requirements for the credit for new vehicles will begin phasing in on Dec. 31 and continue over the next few years under the law, which extends through 2032.

If this seems confusing, it is. Much about the new law is still to be determined, as the law’s broad intentions must be translated by federal agencies into specific regulations to implement the revised credit; details and timetables could change in the process. One thing that is clear is that what has been a fairly easy subsidy program to understand will be much more complicated, with more strings attached for both vehicles and buyers. Cars.com will continue coverage as details are finalized.

Trading Short-Term Pain for Long-Term Gain

Limiting the number of EVs qualifying for a tax break might seem odd for a law that aims to encourage EV adoption. That’s particularly true with EV sales growing despite inventory shortages: Automotive news reports new EV registrations rose 60.4% in the first quarter of 2022 from the same time a year earlier, climbing to 5.1% of overall registrations, according to data firm Experian.

But the law also has bigger — and, for now, conflicting — EV goals. It aims to promote purchases of less expensive EVs for less well-off buyers by putting new limits for the tax credit on vehicle prices and buyer incomes. It also aims both to promote the production of EVs in North America and to shift supply chain partnerships for them to friendly countries with which the U.S. has free-trade agreements. That would cut some reliance on China, though the tilt also excludes Japan, South Korea, the European Union and other friendlier but not free-trade partners. To help with the long-term outlook, however, other sections of the bill include several big buckets of money to support domestic battery and vehicle production projects as well as changes in sourcing of critical materials. It also creates tax credits for electric commercial trucks and buses of up to $40,000.

Changes for Buyers

While that’s the high-level view, here are changes and revisions to the EV credit at the dealer-lot level that will start kicking in for 2023.

Home-Field Advantage

For starters, to get the revised tax credit, the vehicle must be assembled in North America (the final assembly location is on the window sticker). For foreign-built EVs, if you didn’t buy it or sign a “written binding contract” for the vehicle by Aug. 16, you’re out of luck.

Otherwise, until Dec. 31, all the old tax credit rules under Internal Revenue Code Section 30D rules continue to apply — as long as the vehicle is built in North America. The Department of Energy put out a list of qualifying new vehicles from the 2022 and 2023 model years:

  • Audi Q5
  • BMW 330e
  • BMW X5
  • Chrysler Pacifica Hybrid
  • Ford Escape PHEV
  • Ford F Series
  • Ford Mustang Mach-E
  • Ford Transit
  • Jeep Grand Cherokee 4xe
  • Jeep Wrangler 4xe
  • Lincoln Aviator Grand Touring
  • Lincoln Corsair Grand Touring
  • Lucid Air
  • Mercedes-EQ EQS
  • Nissan Leaf
  • Rivian EDV
  • Rivian R1S
  • Rivian R1T
  • Volvo S60

The list includes just some out of more than 70 models now on sale, and there are some caveats.

According to the EPA, for some manufacturers, the build location may vary based on the specific vehicle, trim or the date in the model year when it was produced because some models are produced in multiple locations. The build location of a particular vehicle should be confirmed by referring to its vehicle identification number. Look up your vehicle’s VIN using the EPA’s tool. For example, the 2023 Volkswagen ID.4 can be added to the list, but only for models that were built in Tennessee rather than Germany.

Shoppers should also note that the new federal rules will not affect the various state and local subsidies that are available to EV buyers and that additional federal provisions will go into effect Jan. 1, 2023.

No Penalty for Selling Lots of EVs

The old limit of 200,000 EVs and PHEVs per automaker is lifted. That means Tesla and GM will again be eligible in 2023. Toyota, which was losing the credit, and Ford and Nissan, which could have been next, no longer will have that concern. Until Dec. 31, however, the old rules apply to these vehicles.

No Credit for Toys for the 1%

The law also sets vehicle price and buyer income limits for EV credits. The maximum price for the credit for new pickups, vans and SUVs is $80,000; for cars, wagons and hatchbacks, the cap is $55,000 (watch for a fight over how the government classifies specific vehicles for credit purposes). Buyers, meanwhile, can have a maximum household income of $300,000 for joint filers, $225,000 for heads of households and $150,000 for individuals. Neither the price nor income limits likely seem all that strict for most of us, but it addresses “subsidy for the rich” criticism of the current credit.

Used-Car Buyers Get a Break

Used EVs will be eligible for a tax credit for the first time to help more regular folks join in on the fun. Starting in 2023, the law will allow a credit of up to $4,000 or 30% of the sale price, whichever is lower. The vehicle must be bought from a dealer, be at least two model years old and have a sale price no higher than $25,000. Buyers can have income of up to $150,000 for a joint return, $112,000 for heads of household and $75,000 for individuals. You can check out used EVs for sale on Cars.com.

No Waiting for the Money

Starting in 2024, when the new system is fully in place, you’ll be able to get the credit when you buy the car and will no longer have to wait until you file your taxes. It should work like a factory rebate: You’ll transfer the credit to the dealer at purchase and get that much off the final price. Be warned that you collect the credit before your income for that year is final, so if you’re lucky enough to beat the salary cap, the IRS might want the money back. In 2023, however, you’ll still have to wait and take the credit when you file your 2023 taxes, according to the Treasury.

Battery Will Power the Credit

Qualification for the full $7,500 credit eventually will be split into two equal parts, both based on new requirements for the vehicle’s battery. A vehicle could qualify for one, both or none. A credit of $3,750 will be based on the value of the battery’s components made or assembled in North America. The other $3,750 will be based on the value share of key materials (such as lithium, nickel and cobalt) that were mined or processed by a U.S. free-trade partner or obtained through electronics recycling in North America. The required percentage minimums for each half would ratchet up over the years. Separately, after 2023, no battery components from China would be allowed.

This has been a particularly contentious area for the new credit. Determining regulations to calculate the content value in these complex assemblies will be complicated; they could be open to interpretation and may not be in place as planned by the end of next year. Until then, it appears that most of the vehicles made in North America will be eligible for a credit, but stay tuned for more government guidance.

What’s a Shopper to Do?

The only reason to rush out now is if you’re ready to buy and the vehicle you want won’t meet the price caps next year — and is available. Keep in mind that the tax credit is not “refundable,” which in tax parlance means if you only owe the feds $5,500 when you file your 2022 taxes, that’s all you get — it’s use it or lose it. Also keep in mind that if you pay a “market adjustment” over the sticker price, you gained nothing.

If you don’t need a car now, there is no reason to hurry and lots of reasons to wait. For starters, if you want a used EV, there is no credit until next year, and ditto if you want a Tesla or GM vehicle.

And as noted, details of the new law remain in flux. The IRS and Department of Treasury say they “will post information and request comments from the public on various existing and new tax credits in the coming weeks and months, including on further changes to eligibility rules for clean vehicle tax credits.”

Meanwhile, automakers will be working hard to shore up their assembly and supply plans to maximize tax credit eligibility for their vehicles and to qualify for some of the newly available industry subsidies; they’ll also be working to offer vehicle variants that meet the price caps. Finally, a gaggle of all-new EVs and PHEVs are in the pipeline for the next few years that could be winners, whether you get a tax credit or not.

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