Tax Credit Mayhem for Electric Vehicles
Decoding the new Clean Vehicle Tax Credit
A lot of folks are considering switching to an electric vehicle (EV). Their popularity is on the upswing. They require little maintenance. They run so quietly, that for pedestrian safety, manufacturers added a noise when it’s moving below 20 miles per hour. So far they have opted for a whining noise and not a recording of “watch the car please.”
Under the Inflation Reduction Act, you may get a tax credit of up to $7,500. For used EVs, the credit is 30% of the sale price up to a $4,000 credit. While the credit is an incentive, its provisions are complex and limiting. You are not going to want it to dominate your purchase decision. Consider all the usual factors in your purchasing decision, such as safety, reliability, overall cost, passenger room, cargo space and comfort features. And specifically for EVs the distance range before you need a battery recharge.
To get a credit the vehicle has to be on an eligibility list. The MSRP of a new EV cannot exceed $80,000 for vans, sports utility vehicles, and trucks and $55,000 for all others. For used, the price must be less than $25,000. EVs are not cheap, so the price limits will leave you with choosing among the least equipped models. Kelly Blue Book puts the average new EV at $66,000, so you can see the problem. The 2023 Motor Trend SUV of the year is the Hyundai Ionic 5. Its MSRP starts at $41,450. Hyundai says it’s a SUV and Motor Trend obviously agrees. Alas, the government does not and limits the model to $55,000. Not to worry, it didn’t make the list anyway. Hyundai and 11 other companies don’t have any models on the list including Mercedes, Toyota and Subaru.
Credit eligibility comes with many limitations and conditions. Some rules are so complex the IRS is still working on them and is not expected to issue complete regulations until sometime in the Spring. There are restrictions on foreign vehicles. President Biden is getting more than an earful from some of our biggest allies. There may need to be some concessions in that regard.
There are limits on the modified adjusted gross income of the purchaser. For new, the limits are $300,000 for joint filers and $150,000 for single. For used, limits $150,000 for joint filers and $75,000 for single filers. The credit is nonrefundable, so you can't get back more for the credit than your tax liability.
Additional factors to qualify for the credit include the vehicle’s battery capacity, manufacturer and assembly location. At the time of sale the seller must report required information to you and the IRS. In addition, you need a written and binding sales contract to substantiate your claim for the EV tax credit. The vehicle has to be assembled in North America which will be indicated by a VIN Decoder tool.
On the internet you will find the IRS list of Manufacturers and Models for New Qualified Clean Vehicles Purchased in 2023 or After. Listed is a Ford Escape Plug-In Hybrid. Maybe that’s an idea. Tesla just announced a big sale and it has 8 models listed. You are advised to check back for additions to the list. Again, being on the list is just step one.
EVs have and are going to continue to play a significant role in the future of the automotive industry. California has banned the sale of new gas-engine cars by 2035, and our neighbor Delaware has announced plans to do the same. Several states are considering similar plans. Of course, aggressiveness of any plan is subject to change in either direction.
In the US auto makers sold over 800,000 EVs moving to 5.8% of all sales from 3.2% a year before. Tesla dominated with Ford in second place. For sure, manufacturers, in their own best interest, will lobby to make the credit easier to get in the future.
In the meantime, if you are considering an electric vehicle and are otherwise eligible for and interested in the credit, you should probably wait until the rules are finalized this spring. Then, if all the factors align, and there are many, you may be rewarded with a tax credit.
Links to IRS list of Manufacturers and Models for Qualified Clean Vehicles NEW EVs