Matter & Substance
  October 13, 2022

Understanding the Expanded Electric Vehicle Tax Credits

On January 1, 2023, the Electric Vehicle Tax Credits will be distributed under new rules. With the passage of the Inflation Reduction Act (IRA), more than $300 billion will be invested in energy and climate reform, making it the largest federal clean energy investment in U.S. history. By incentivizing the purchase of an electric vehicle, the government hopes to increase the demand and, subsequently, production of electric vehicles as we try to shift to greener, more sustainable methods of transportation.

Is an Electric Vehicle Right for Me?

In the past few years, electric vehicles have become more widely available as several automakers have started to create models of their own, bringing down the price on something many consumers used to view as unobtainable. If we look at BMW—which carries "electrified" (hybrid) versions of popular models—we can see a cost difference of only a few thousand. For instance, the BMW X5 core model has a starting MSRP of $60,600, and the electrified X5 starts at $63,700—just over $3000 in difference of price.

But before you decide to purchase an electric vehicle, there are several factors to consider in determining if an EV fits with your lifestyle.

With most models holding between 200-300 miles of range between charges, electric vehicles are a logical choice for those whose commutes don’t take them too far from home. And if you live in a condo or apartment, charging an EV might become too much of a hassle as you rely on nearby public charging stations (though these stations tend to get you to a full charge relatively quickly). If you don’t want to purchase a fully electric vehicle, there are various types of EVs available, including hybrid options.

However, purchasing an electric vehicle will save you time and money as you start cutting gas stations out of your routine. There is a large cost savings when it comes to relying on a charge over fuel: according to the US Department of Energy, it will cost you about $6.00 to reach a full charge on your EV’s battery. And without oil changes, transmission fluid flushes, belt replacements, etc., you’ll spend less money overall on the maintenance costs of a typical gas-powered vehicle.

Expanded EV Tax Credits

As of January 1, 2023, the IRA maintains the existing $7,500 consumer credit for the purchase of a qualified new clean vehicle, including electric vehicles, plug-in hybrids, and hydrogen fuel cell vehicles. Until the end of 2023, the credit is received when you file your taxes the following year, but starting in 2024, the credit is given at the point of sale, where buyers can apply it as either a down payment or as a price reduction. The EV credit also sets income limits—$150,000 for single filers and $300,000 for families—as well as limits on the price of the vehicle of $80,000 for vans, trucks, and SUVs and $55,000 for all other models.

Starting in 2023, half of the potential credit will depend on two other factors: where the battery components are made and where the raw materials used in the production of the battery come from. In 2023, 50% of the EV battery's components must come from the U.S. or another country that has a free-trade agreement with the United States, with that percentage increasing incrementally. By 2029, it has to be 100%.

Therefore, it’s likely that in the credit’s emergence, automakers will struggle to develop supply chains that meet the strict sourcing requirements. It’s unlikely that many electric vehicles sold in the next couple of years will qualify for the full $7,500 incentive, but the Act seeks to create these restrictions in order to grow an American system that’s less reliant on foreign supply chain.

Additionally, the purchase of a used electric vehicle may be eligible for a rebate of either $4,000 or 30% of the vehicle's sale price, whichever is lower. The maximum price of the qualifying used EV is $25,000 and has an income limit of $75,000 for single filers and $150,000 for joint filers. The credit would continue for all qualifying electric vehicles until December 31, 2032.

Electric Vehicles Purchased in 2022

If you entered into a written binding contract to purchase a new qualifying electric vehicle before August 16, 2022, but you did not take possession of the vehicle until on or after August 16, 2022, you may claim the EV credit based on the rules that were in effect before August 16, 2022. Those rules are as follows:

The Electric Vehicle Tax Credit is worth up to $7500 in the year it was purchased. If you qualify for the full amount of the credit, it can bring your tax owed to zero, but it won’t create a refund on your return. The amount you can receive is largely determined by the battery size and if it’s a hybrid or full electric model.

To be certified for the credit by the manufacturer before August 16, 2022, the vehicle has to meet the following requirements:

  • The vehicle must be made by a manufacturer (i.e., it doesn't include conventional vehicles converted to electric drive).
  • It must be treated as a motor vehicle for purposes of Title II of the Clean Air Act.
  • It must have a gross vehicle weight rating (GVWR) of not more than 14,000 lbs.
  • It must be propelled to a significant extent by an electric motor which draws electricity from a battery which
    • has a capacity of not less than 4 kilowatt hours and
    • is capable of being recharged from an external source of electricity.

The following requirements must also be met for a certified vehicle to qualify before August 16, 2022:

  • The original use of the vehicle commences with the taxpayer—it must be a new vehicle.
  • The vehicle is acquired for use or lease by the taxpayer, and not for resale.
    • The credit is only available to the original purchaser of a new, qualifying vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.
  • The vehicle is used mostly in the United States.
  • The vehicle must be placed in service by the taxpayer during or after the 2010 calendar year.

As is currently underway with Toyota, the Electric Vehicle Tax Credit begins to phase out for vehicles under the previous rules at the beginning of the second calendar quarter after the manufacturer has sold 200,000 eligible plug-in electric vehicles in the United States since January 1, 2010.

If you purchase and take possession of a qualifying electric vehicle 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). If you entered into a written binding contract to purchase a new qualifying vehicle before August 16, 2022, see the rule above.

Other Relevant Credits

The Inflation Reduction Act (IRA) contains a tax credit used for electric vehicle charging infrastructure. The updated alternative fuel infrastructure credit runs the credit through the end of 2032 in hopes of providing reliable, longer-term support for charging infrastructure.

Beginning January 1, 2023, if you install a charging station in your home, the tax credit is 30% of the cost of hardware and installation, up to $1000. Businesses that install new EV chargers or EV charging equipment can benefit from the same tax incentive of up to 30% of the total cost of equipment and installation, but they will have to meet certain labor and construction requirements to be eligible to claim the full incentive. For commercial use under the new law, the tax credit per property item is up to $100,000 per EV charger. The tax credit for business and home installations will also apply to other EV charging equipment like bidirectional (i.e., two-way) chargers.

If you install an EV station prior to the new year, there is still a credit for upgrading and installing a charger for your electric vehicle. It covers 30% of the costs with a maximum $1,000 credit for residents and $30,000 federal tax credit for commercial installs. The credit is retroactive, meaning you can still apply for installations made as early as 2017.

Depending on the state you live in, there may be additional state tax credits, rebates, and fee reductions to incentivize the purchase and use of electric vehicles. For example, Illinois offers an Electric Vehicle Supply Equipment (EVSE) Rebate, and Colorado has a Plug-In Electric Vehicle (PEV) Tax Credit.

Mike Deering

Tax Partner, Director of Taxes

Mike specializes in advising high-net-worth families on their tax, charitable, and estate planning needs. He also works on succession planning; helping owners transfer their businesses from one generation to the next. As Director of Taxes, he believes in empowering his team to set and accomplish their career goals. Mike enjoys outdoor sports in the summer and movies in the winter with his children. He is an avid Cubs and golfing fan, and he enjoys an annual “bucket list” golf course trip with his twin brother.