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Obtaining a $7,500 tax credit it’s likely to become more difficult to purchase a new electric car in a few months – meaning potential buyers wanting a financial incentive may want to speed up their timetable.
The Law on reducing inflationthe historic climate law signed by President Biden in August changed the rules for an existing tax credit tied to the purchase of “clean” vehicles.
The law, which extended the tax credits until 2031, changed some of the requirements to get the full $7,500 “clean car credit.”
Some tax and auto experts believe the changes — designed primarily to increase manufacturing and supply chains within the U.S. and allies — will temporarily make it more difficult to qualify for the credit, in whole or in part.
Some of the tax credit rules went into effect on January 1. (More on those below.) But others related to minerals and battery components—perhaps more difficult to enforce—don’t go into effect until the IRS issues guidance. The agency expects to do this in March 2023.
At that time, many clean vehicles that currently qualify for tax credits may no longer be eligible for tax credits – at least until manufacturers can meet the new rules.
Consumers looking for a new electric car, truck or SUV will likely have a limited window of time to claim the tax credit, experts say.
“There’s almost a three-month grace period,” said Leslie Jantarasamy, director of the Bipartisan Policy Center’s energy program.
Manufacturers determined 27 all-electric and 12 hybrid models of cars and trucks are eligible for tax credits based on existing rules, according to data from the IRS as of Jan. 17. (Buyers must also meet criteria such as income requirements.)
Tesla reduce prices on some car models this month, helping them qualify for tax credits. The list of vehicles is likely to be expanded in the coming days and weeks, according to the IRS.
After the IRS guidelines came out, Jantarasamy said, “I don’t think there’s any doubt that the list of eligible car models will shrink in the short term.”
However, if this happens, consumers can get a separate tax break buying a used electric car instead of a new one, or perhaps leasing, experts say.
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Loan for a clean car is a “non-refundable” tax credit. Essentially, this means buyers only get the full benefit if they have an annual federal tax liability of at least $7,500.
Buyers can claim if a new electric or fuel cell vehicle is “placed in service” after Dec. 31, 2022. A vehicle is placed in service when a taxpayer “takes possession” of it, according to the IRS; which may differ from the purchase date.
There are already some rules in place that limit the buyers and vehicles that qualify:
- income: Married couples are not eligible for the new car credit if their modified adjusted gross income on their joint tax return exceeds $300,000. The limit is $150,000 for taxpayers and $225,000 for heads of households. Buyers can use a smaller portion of their income in the year they got the car or in the previous year.
- Price of the car: The credit is not available if the manufacturer’s suggested retail value 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 vehicle.
- Production: The car had to undergo final assembly in North America. Buyers who have a Vehicle Identification Number (VIN) can consult a US Department of Energy website to see if it meets the requirements.
The aforementioned list qualifying cars the IRS quoted are based on these criteria.
The upcoming IRS guidance — again expected in March — adds two requirements for car batteries.
The pending regulations would tie the amount of the $7,500 credit to whether a new clean vehicle battery meets critical requirements for minerals and battery components.
- Critical minerals: Broadly speaking, the rule requires that a certain proportion of the battery’s critical minerals be “mined or processed in the United States or in any country from which [it] has an active free trade agreement or is processed in North America,” said A Document of the Ministry of Finance. This share increases over time: 40% or more in 2023; 50% in 2024; 60% in 2025; 70% in 2026; and 80% after that.
- Battery components: At least half of the car’s battery components (as battery cells and modules) must be manufactured or assembled in North America starting in 2023. This share will increase to 60% in 2024 and 2025. and will gradually increase to 100% in 2029.
Vehicles that meet one of these requirements receive a half credit ($3,750). Cars that meet both receive full value.
It is likely that few, if any, clean new vehicles will be eligible for the full $7,500 when these two requirements come into effect.
“We encourage consumers who are interested in buying and are in a place to buy right now to take advantage of it,” said Ingrid Malmgren, policy director for Plug In America, a nonprofit advocacy group for clean cars. “Because we don’t know what’s going to happen in March.”
Until March, the full value of the loan is tied to a Calculation of battery capacity.
Vehicle specifications such as battery capacity, final assembly location and VIN are listed on the window sticker The IRS said.
However, there are other options available to buyers when the current list of eligible cars is reduced in March.
Households can buy a used clean car and can get up to $4,000 in tax credits, experts say. Those tax breaks, which became available Jan. 1, impose some requirements on cars and buyers, but are generally less stringent than for new cars, experts say.
Also, it’s possible that dealers who lease clean cars could pass on some tax savings to consumers. In that case, a dealer claiming the commercial clean vehicle tax credit can pass on a portion of the $7,500 tax credit in a lease or as a down payment break, for example, Malmgren said. This commercial credit is independent of income, battery, build or MSRP requirements, she said.
However, consumers should ask dealers before renting, she added, because it is not given that such organizations will claim tax credits or transfer money to consumers for rent.