Why the $7,500 EV tax credit may be harder to start in March

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Getting a $7,500 tax break for the purchase of a new electric car is likely to get harder in a few months — meaning potential buyers who want the financial incentive may want to speed up their timeline.

The Inflation Reduction Act, a landmark climate bill that President Biden signed into law in August, modified rules for an existing tax credit related to the purchase of “clean” vehicles.

The law, which extended the tax break through 2031, changed some requirements to get the full $7,500 value of the “clean vehicle credit.”

Some tax and auto experts think the adjustments — largely designed to bring more manufacturing and supply chains within U.S. borders and those of allies — will temporarily make it more difficult to qualify for all or part of the credit.

Some rules are on hold until the IRS issues guidance

Some tax credit rules went into effect on January 1. (More on that below.) But others related to battery minerals and components — probably the most challenging to meet — won’t take effect until the IRS issues guidance. The agency expects to do so in March 2023.

At that point, many clean vehicles that currently qualify for the tax break may no longer do so — at least, until manufacturers can comply with the new rules.

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Consumers looking to buy a new electric car, truck or SUV likely have a limited time frame within which they can more easily claim the tax break, experts say.

“There’s almost a three-month grace period,” said Lesley Jantarasami, general director of the energy program at the Bipartisan Policy Center.

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Manufacturers have identified 27 all-electric and 12 plug-in hybrid car and truck models eligible for the tax break based on existing rules, according to IRS data dated Jan. 17. (Buyers must also meet criteria such as income requirements.)

Tesla lowered prices on some car models this month, making them eligible for a tax break. Additions to the vehicle list are likely to come in the coming days and weeks, the IRS said.

After IRS guidelines come through, Jantarasami said, “I don’t think there’s any doubt that the list of eligible car models will shrink any time soon.”

If that happens, however, consumers could instead get a separate tax break for buying a used electric car instead of a new one, or perhaps by leasing a car, experts said.

How the $7,500 Clean Vehicle Tax Credit Works

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The clean vehicle credit is a “non-refundable” tax credit. Essentially, that means buyers will only get the full benefit if they have an annual federal tax liability of at least $7,500.

Buyers may be eligible if the new plug-in electric or fuel cell vehicle “comes into service” after December 31, 2022. A car is put into service when the taxpayer “takes possession” of it, according to the IRS; which may differ from the date of purchase.

Some rules have already come into effect limiting eligible buyers and vehicles:

  • Income: Married couples are not eligible for the new vehicle credit if their adjusted adjusted gross income on a joint tax return exceeds $300,000. The limit is $150,000 for individual tax claimants and $225,000 for heads of households. Buyers can use the lesser of their income in the year they take delivery of the car or the previous year.
  • Vehicle price: The credit is not available if a manufacturer’s MSRP exceeds $80,000 for vans, SUVs, and pickups or $55,000 for other vehicles. Note: MSRP is not necessarily the price you pay for the car.
  • Production: The vehicle must have been final assembled in North America. Buyers who have a car’s vehicle identification number (VIN) can check a U.S. Department of Energy website to see if it qualifies.
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The aforementioned list of eligible cars cited by the IRS is based on these criteria.

‘We don’t know what will happen in March’

Upcoming IRS guidelines — again expected in March — add two requirements for car batteries.

The pending rules will tie the $7,500 credit amount to whether a new, clean vehicle’s battery meets a critical mineral and battery component requirement.

  • Critical Minerals: In general, the rule requires that some portion of the battery’s critical minerals be “extracted or processed in the United States, or any other country with which [it] has a free trade agreement in effect, or recycled in North America,” according to a Treasury Department document. That share will rise over time: 40% or more in 2023; 50% in 2024; 60% in 2025; 70% in 2026; and 80% thereafter.
  • Battery Components: At least half of the vehicle’s battery components (Like it battery cells and modules) must be manufactured or assembled in North America from 2023. That share rises to 60% in 2024 and 2025 and gradually grows to 100% in 2029.

Cars that meet any of these requirements will receive half of the credit ($3,750). Cars that meet both will receive full value.

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It is likely that few, if any, new clean vehicles will qualify for the full $7,500 when those two requirements go into effect.

“We encourage consumers who are interested in buying and have a place to buy right now to jump in,” said Ingrid Malmgren, policy director at Plug In America, a nonprofit advocacy group for clean vehicles. “Because we don’t know what’s going to happen in March.”

Until March, the full value of the credit is linked to a calculation of the battery capacity.

Vehicle specifications such as battery capacity, mounting location and chassis number are listed on the window decal, the IRS said.

Drivers have other options for getting tax credits

However, other options will be available to buyers if the current list of eligible vehicles is shortened in March.

Households can purchase a used, clean vehicle and may receive a tax break worth up to $4,000, experts said. That tax break, which became available Jan. 1, introduces some requirements for car and buyer, but is generally less strict than those for new vehicles, experts said.

In addition, dealers who lease clean cars may be able to pass some tax savings on to consumers. In this case, for example, a dealer claiming a commercial clean vehicle tax credit could pass a portion of its $7,500 tax credit into a lease or as a break in the deposit, Malmgren said. This commercial credit is not subject to income, battery, assembly or MSRP requirements, she said.

However, consumers should ask dealers before leasing, she added, as it is not self-evident that such entities qualify for a tax break or pass money to consumers in a lease.

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