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From just a handful of models just a few years ago, there has been a dramatic growth in the number of fully electric and plug-in hybrid vehicles. These days, just about every automaker is manufacturing and selling such vehicles. In fact, there has also been an emergence of automakers who make EV or PHEV exclusively. It is safe to say, the prices of these vehicles will inevitably become more and more reasonable in the future.
The recently passed Inflation Reduction Act of August 2022 too indicates that the federal government clearly wants to promote the production and sale of affordable mass-market EVs. However, this latest act has also introduced a lot of parameters to be mindful of.
Since a lot of people rely on federal and state tax incentives and rebates to make these vehicles more affordable, apparently the Inflation Reduction Act will be of high interest to them. Let’s know about them in detail.
The Inflation Reduction Act of 2022 significantly changes the eligibility rules for tax credits available for clean vehicles beginning in 2023 to reduce carbon emissions enabling the United States to invest better in energy security.
According to the Internal Revenue Code Section 30D (originally enacted in the Energy Improvement and Extension Act of 2008), for vehicles acquired after December 31, 2009, a total credit limited to $7500 was allowed.
Effective immediately, to claim the tax credits for purchasing a new electric vehicle after August 16, 2022, the final assembly of the qualifying electric vehicles must have occurred in North America (Canada, Mexico, U.S.). It will affect the vehicles purchased through 2032.
There is a cap on this tax credit of 200,000 electrified vehicles per manufacturer, which means the credit begins to phase out when at least 200,000 of the qualifying vehicles have been sold.
Added to that, the vehicle must be acquired for use or lease and not for resale. Additionally, the original use of the vehicle must commence with the taxpayer and the vehicle must be used predominantly in the United States.
The maximum credit available for new vehicles is still $7,500, but the number of credits you get is no longer dictated by the size of the battery.
It splits into two halves with separate criteria that depend upon the origin of the critical battery minerals and the place of sourcing for the battery components. To qualify, at least 40% of the critical minerals in the battery must have been either recycled or extracted, or processed in the U.S. (or in any country that has a free trade agreement with the U.S.). After that, the percentage will gradually increase by 10% annually through the subsequent years.
There is a whole list of vehicles that meet the final assembly requirements provided by the Department of Energy and is based on data submitted to the National Highway Traffic Safety Administration (NHTSA) and FuelEconomy.gov as of August 1, 2022.
It is advisable to always double-check the build location of the vehicle, regardless of whether the vehicle you're interested in is on the list. You can run the vehicle identification number (VIN) through a VIN decoder and look for the country name in the "Plant Information" field at the bottom of the page, or else simply check the window sticker if you have access.
The number that we see most often – the $7,500 tax credit – is available for fully electrified vehicles, those that run on battery power alone. The tax credit for PHEVs depends on the size of their battery, with the lowest credit being $2,500.
So, for example, the Kia Niro EV is eligible for the full $7,500 tax credit. The Kia Niro PHEV, which has a smaller battery but does plug in for power, is eligible for a $4,543 tax credit. The Kia Niro Hybrid is not eligible for this tax credit because it does not plug in.
Also, this should not be referred to as a flat $7,500 credit, instead, it's only worth $7,500 to someone whose tax bill at the end of the year is $7,500 or more. Let's say if someone owes $3,000 in income tax — that's all the tax credit will be.
For leased EVs, the tax credit goes to the manufacturer that's offering the lease, not the lessee. The automaker may or may not factor the credit into the cost of the lease to lower your monthly payment.
The tax credit for used EVs will be calculated at either 30% of the vehicle's value or $4,000, whichever is less.
If you had agreed to purchase a new qualifying electric vehicle before August 16, 2022, by entering into a written binding contract, but didn't take possession or weren’t handed over the vehicle until August 16, then you may claim the EV credit based on the rules that were in effect before August 16, 2022.
For purchase and possession after August 16, 2022, and before January 1, 2023, aside from the final assembly requirement, the rules in effect before the enactment of the Inflation Reduction Act for the EV credit apply (including those involving the manufacturing caps on vehicles sold).
These incentives vary by state, and much like the federal tax credit, are contingent on multiple factors. Some states, particularly California, have programs to help lower-income shoppers buy electric vehicles. And there are additional incentives available in many states for electrified vehicles, so it's worth checking locally to see what kind of assistance you can find for buying a new EV.
Taxes are tricky! A tax credit is meant to reduce your annual tax liability, a credit against taxes owed, and shouldn't be confused with a tax deduction that lowers your taxable income. It is also not a rebate or refund and does not come as a discount on the vehicle's price at the dealership.
There is still much to discover in terms of calculating potential savings or rebates before making a new EV purchase or determining what tax credits might already be available. If you want to learn more about the Inflation Reduction Act of 2022, one of our recently included on-demand CPE courses could be of high use to you.
Imtiaz Munshi, CPA 
