Things to know about the IRS Expansion of the Electric Vehicle Tax Credit

electric vehicle credit, tesla

If you’re in the market for an electric vehicle and you’ve kept your eye on the ball, you’ll have noticed the recently passed Inflation Reduction Act of 2022 includes changes to the credit available for the purchase of an electric vehicle. These changes are quite complex, phasing in over time, but there are some benefits to come with them (although only if your car complies with the requirements). 

These new rules are designed to stimulate industry growth within the United States and ultimately to encourage electric vehicle manufacturers to move their battery supply chains from China to North America. We’ve broken down these changes into different sections to make them as clear as possible. See below for how to best take advantage of them in advance of your electric vehicle purchase.

1. North American assembly requirement

One of the new rules is in effect right now. To qualify for the electric vehicle credit, the final assembly of your vehicle has to take place in North America. You can check whether the vehicle meets this requirement by entering its vehicle identification number (VIN) into the VIN decoder. There’s also a list of makes and models that generally meet the requirement (but we recommend double-checking for any particular vehicle by using the VIN decoder).

2. Manufacturer limitation

The good news is, effective January 1 2023, the manufacturer limitation will have been lifted. Under the original manufacturer limitation, once a manufacturer sold 200,000 electric vehicles, the taxpayer’s eligibility to take a tax credit for vehicles produced by them would phase out. This won’t be the case anymore from this January.

3. General Motors and Tesla

Taxpayers are currently prevented from taking the credit for electric vehicles manufactured by General Motors and Tesla. But, starting from the beginning of 2023, taxpayers will be able to take the credit for GM and Tesla vehicles again. It’s important to take note, however, of the manufacturer’s suggested retail price (MSRP) limits below.

4. Calculation of the credit (part one)

The way the credit is calculated is changing later this year. We don’t know when the rules are changing but it will be as soon as the IRS issues regulations that implement the new rules. Under the previous rules, the base amount of the electric vehicle credit was $2,500 per vehicle. The allowable credit will increase to a maximum of $7,500 per vehicle based on a formula which increases the credit by $417 for every kilowatt hour of battery capacity in excess of five.

Under the new rules, the amount of the credit will be based on two separate requirements, each one based on where the vehicle’s battery is sourced:

  • Taxpayers will get a $3,750 credit for meeting the critical minerals requirement. This requirement states that a minimum percentage of the minerals contained in the battery must be sourced in the United States (or a country with which the United States has a free trade agreement in effect)
  • Taxpayers also can get an additional $3,750 credit for satisfying the battery component requirement. This requirement stipulates a minimum percentage of the value of the components of the battery must be manufactured or assembled in North America.

Taxpayers can achieve one or both requirements, for either a $3,750 credit (if only one requirement is satisfied) or a $7,500 credit (if both requirements are achieved).

5. New qualified fuel cell motor vehicle (part two)

Effective January 1 2023, the credit will also be available for new qualified fuel cell motor vehicles. New qualified fuel cell motor vehicles are vehicles propelled by power derived from one or more cells that convert chemical energy directly into electricity by combining oxygen with hydrogen fuel, and that meets certain additional requirements. New qualified fuel cell motor vehicles have to meet the North American final assembly requirement. 

They can qualify for either a $3,750 or $7,500 credit based on whether they satisfy one or both of the critical minerals requirement and battery components requirements. 

6. Modified adjusted gross income limitation

Starting on January 1 2023, your ability to take the electric vehicle credit will be limited based on your modified adjusted gross income (MAGI). MAGI is adjusted gross income (AGI) with adjustments for income received from U.S. territories. For most taxpayers, MAGI will be equal to AGI. You may not take the credit if your MAGI exceeds the threshold amount. The threshold amount is:

  • $300,000 for married taxpayers filing a joint return or a surviving spouse
  • $225,000 for taxpayers filing as head of household
  • $150,000 for all other taxpayers (single, married filing separately)

These amounts are not adjusted for inflation. If your MAGI exceeds this amount, you should buy the electric car before January 1st. 

7. Manufacturer’s Suggested Retail Price (MSRP) limitation

Also starting on January 1 2023, vehicles will not be eligible for the credit if they exceed the set MSRP limits. It is:

  • $80,000 for vans, pickup trucks, and sport utility vehicles
  • $55,000 for other vehicles

This means if you’re looking at a higher-end electric vehicle, you need to act by the end of December. Unfortunately, the manufacturer limitation (point 3 and 4) will not be lifted until January 1st, 2023 so you will not be able to claim credit for higher-end GM and Tesla vehicles exceeding the MSRP limits.

8. Transition rule 

Finally, if you had a binding contract to purchase an electric vehicle as of August 15 2022, or earlier, you can choose to apply the old rules. 

With offices in Austin and Houston, our tax team of CPA’s is well versed in the complexities of the Inflation Reduction Act (IRA) of 2022’s electric vehicle provisions.   If you have any questions about your electric vehicle purchase, reach out to us here.

Get in touch so you can receive the maximum allowance available.