Originally written for Missouri Business Alert
By Lucas Owens
As consumers look to buy cars in the new year, the process may look a little different if you are looking to purchase an electric or plug-in hybrid vehicle.
As a part of the $391 billion spent on addressing climate change and energy security, $13 billion was earmarked for electric vehicle incentives. However, the way electric vehicle tax credits are distributed changed. Prior to 2023, each auto company could sell 200,000 electric vehicles that would have a tax credit of up to $7,500 attached. Notably, some companies, like General Motors and Tesla, passed the amount of electric vehicles they could sell under the old program, meaning consumers would no longer get the tax credit.
For Vehicles
For new vehicles to qualify, it must have a battery capacity of at least 7 kilowatt hours, weigh less than 14,000 pounds, be made by a qualified manufacturer, and undergo final assembly in North America. In addition, the vehicle’s MSRP cannot exceed $80,000 for vans, sport utility vehicles (SUVs), and pickup trucks, or $55,000 for all other vehicles. This means electric vehicles with a price above those numbers, like the GMC Hummer EV (which lowest MSRP is above $100,000), owners will not receive a tax credit. In addition, the seller must report the required information of the sale to you and the IRS.
The qualifications for vehicles will rely solely on where final assembly took place up until March 2023, whereupon the bill will split into two $3,750 tax credit halves. The first part of the tax credit will remain the same, as if final assembly took place in the United States, Canada, or Mexico, consumers can qualify for the tax credit. However, eligibility for both halves of the tax credit will now hinge on the sourcing of battery components and minerals, according to the IRS.
Consumers will qualify for the first half of the tax credit ($3,750) if at least 40% of the battery minerals were extracted, processed, or recycled in the United States or a country that has entered into a free trade agreement with the United States. That required percentage goes up to 50% in 2024, 60% in 2025, 70% in 2026, and 80% in 2027.
To get the second half of the tax credit after March 2023, the vehicle you purchase must have had 50% of the battery components produced or assembled in the United States, or any country in a free trade agreement with the United States. The percentage goes up to 60% for 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% in 2029.
An important aspect to this part of the tax credit, is that as of 2024, if any of the battery components were sourced from a “foreign entity of concern” according to the United States government, the vehicle will immediately be ineligible for the tax credit. At the moment, this includes China, Russia, North Korea, and Iran. After 2025, this includes battery minerals as well. According to Edmund’s Ronald Montaya, this is a big deal because of China’s dominance in battery mineral production.
A key part of the tax credit that existed before 2023 was a sliding scale based on the size of the battery used in the vehicle. This meant that many plug-in hybrid vehicles would only be eligible for a portion of the $7,500. This requirement is now phased out, meaning if you purchase an eligible plug-in hybrid vehicle, you will receive the full $7,500 tax credit.
Used vehicles are slightly different. According to the IRS, the vehicle must cost less than $25,000, have a model year at least 2 years earlier than when you buy it, and be from a dealer, not a private seller.
For new vehicles to qualify, it must have a battery capacity of at least 7 kilowatt hours, weigh less than 14,000 pounds, be made by a qualified manufacturer, and undergo final assembly in North America. In addition, the vehicle’s MSRP cannot exceed $80,000 for vans, sport utility vehicles (SUVs), and pickup trucks, or $55,000 for all other vehicles. This means electric vehicles with a price above those numbers, like the GMC Hummer EV (which lowest MSRP is above $100,000), owners will not receive a tax credit. In addition, the seller must report the required information of the sale to you and the IRS.
The qualifications for vehicles will rely solely on where final assembly took place up until March 2023, whereupon the bill will split into two $3,750 tax credit halves. The first part of the tax credit will remain the same, as if final assembly took place in the United States, Canada, or Mexico, consumers can qualify for the tax credit. However, eligibility for both halves of the tax credit will now hinge on the sourcing of battery components and minerals, according to the IRS.
Consumers will qualify for the first half of the tax credit ($3,750) if at least 40% of the battery minerals were extracted, processed, or recycled in the United States or a country that has entered into a free trade agreement with the United States. That required percentage goes up to 50% in 2024, 60% in 2025, 70% in 2026, and 80% in 2027.
To get the second half of the tax credit after March 2023, the vehicle you purchase must have had 50% of the battery components produced or assembled in the United States, or any country in a free trade agreement with the United States. The percentage goes up to 60% for 2024 and 2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% in 2029.
An important aspect to this part of the tax credit, is that as of 2024, if any of the battery components were sourced from a “foreign entity of concern” according to the United States government, the vehicle will immediately be ineligible for the tax credit. At the moment, this includes China, Russia, North Korea, and Iran. After 2025, this includes battery minerals as well. According to Edmund’s Ronald Montaya, this is a big deal because of China’s dominance in battery mineral production.
A key part of the tax credit that existed before 2023 was a sliding scale based on the size of the battery used in the vehicle. This meant that many plug-in hybrid vehicles would only be eligible for a portion of the $7,500. This requirement is now phased out, meaning if you purchase an eligible plug-in hybrid vehicle, you will receive the full $7,500 tax credit.
Used vehicles are slightly different. According to the IRS, the vehicle must cost less than $25,000, have a model year at least 2 years earlier than when you buy it, and be from a dealer, not a private seller.
For Consumers
On the car buyer’s end, one has to buy it for their own personal use, which means no flipping it on the secondary market, use it primarily in the United States, and have an individual income less than $150,000 for individual filers, $225,000 for heads of households, and $300,000 for married couples filing jointly.
Consumers qualify for the used electric vehicle tax credit if they have not claimed another used clean vehicle tax credit in three years, are not claimed as a dependent on their tax return, are not the original owner, and bought the vehicle for their own use. In addition, their claimed income cannot exceed $75,000 for individuals filing, $112,500 for heads of households, and $150,000 for married filing jointly.
For Missourians looking to receive tax benefits, it is important to know that right now there is no other incentive for purchasing electric vehicles aside from the $7500 tax credit. In addition, the tax credit is not due when you purchase an electric car, but rather when you fill out your taxes for the year. This also means that the money comes solely out of your tax bill, meaning if your federal tax bill does not come out to above $7500, you do not receive a payment back from the IRS.
While the electric vehicle market has had supply chain shortages, many dealers have added extra markups to vehicles. These do increase the cost of the vehicle for the buyer, it is important to note that this does not affect the ability to receive the tax credit; if the original MSRP is below $80,000 for vans, SUVs, and pick-up trucks, or $55,000 for all other cars, you still receive the tax credit, even if you end up paying above that.
One thing to look out for this year’s tax returns, according to Edmund.com’s Ronald Montoya, is that the rules for final assembly, unlike the rest of the incentives put forth by the Inflation Reduction Act, applied immediately on August 16, 2022. If you entered into a final contract after that date, the final assembly must have been in the United States, Canada, or Mexico to qualify for the tax credit.
Another aspect of federal incentives is a credit for installing an electric vehicle charger in your residence. According to the IRS, if you are eligible for the tax credit, you can claim 30% (up to $1,000) of the cost of your home charger if that charger is level 2 or higher.