New EV Tax Credits Require Planning to Glean the Largest Benefits
By Jeff Abadie, CFP®
October 25, 2022
If you’re in the market for an electric vehicle (EV), you’re probably already aware that the recently signed Inflation Reduction Act puts into place some new rules around EV tax credits—some of which make it harder to claim the full credit after the end of this calendar year. But with some careful financial planning, and a little bit of research, you can still offset the cost of your purchase significantly. Here’s what you need to know.
Which electric vehicles are eligible for the full tax credit?
If you plan to purchase a new EV before the end of 2022, you’ll want to determine which vehicles are still eligible for the full $7,500 tax credit. Until year end, only the first 200,000 electric vehicles sold from a given manufacturer are eligible for any credit. This means that the largest EV builders—such as Tesla—are already over their limit for this year. Unfortunately, that means you have fewer options to purchase an EV in 2022 and receive the full credit. Your EV will also need to have final assembly in North America to qualify for the credit. Fortunately, the U.S. Department of Energy has put together a list of vehicles that are likely to meet that requirement.
Beginning next year in 2023 and beyond, the 200,000-manufacturer sales limit goes away, but the manufacturer and buyer requirements to receive the full $7,500 tax credit become even more stringent. First, the vehicle will need to fall under a price cap of $80,000 for electric pickups, SUVs, and vans, and under $55,000 for all other EVs. The new law also puts into place requirements on the sourcing of minerals that fuel the all-important batteries. In 2023, 40% of battery metals like lithium must be either extracted in the U.S. or in a country with which the U.S. has a free trade agreement. This requirement goes up to 80% in 2027. In 2023, 50% of battery components will need to be made in North America, increasing to 100% by 2029.
Qualifying under an income cap
You’ll then also need to qualify under an income cap with modified adjusted gross income (MAGI) of no more than $150,000 for single filers. As head of household, that cap goes up to $225,000, while joint filers can have MAGI as high as $300,000 and still qualify. Unfortunately, as of today, there are no EVs currently in production that will qualify for the full tax credit in 2023. Buyers will be eligible for partial credit, depending on battery size and manufacturing details.
Used electric vehicles
If you’re considering a used electric vehicle, you could qualify for some smaller tax credits after the first of the year. Beginning in 2023, used EVs will qualify for up to $4,000 in credits, or 30% of the sales price, whichever is less. But again, you’ll need to meet some income requirements, and these are less generous than if you were buying new: individual income must be no more than $75,000 or $112,500 for head of household, and $150,000 for joint filers.
State tax credits
Finally, many states offer additional tax credits to buyers of electric vehicles. Thankfully, the Department of Energy maintains a state-by-state list of current incentives. You’ll want to see what additional credits you may qualify for when you’re preparing to make an EV purchase. We at Sand Hill want to make sure that our clients understand the complex tax credit situation before making any final decisions when it comes to purchasing an electric vehicle. Please keep in mind that it’s essential to discuss your options with your Wealth Manager and your tax professionals if you’re looking to maximize the EV tax credits. If you have any questions or would like to learn more, please let us know.
Sources:
U.S. Department of Energy Alternative Fuels Data Center
Internal Revenue Service
www.fueleconomy.gov
www.pcmag.com/how-to/ev-taxcredits-how-to-get-the-most-money
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