Now that President Joe Biden has signed the Inflation Reduction Act into law, advisors should begin to dig into the details so that their clients are maximizing the benefit of the new energy tax credits. The tax credits for electric vehicles are changing — and for many clients, may become much more substantial in the coming years.
While questions do exist about how the tax credits will work for the 2022 tax year, many consumers may be attracted to the possibility of a new way to save on taxes. The new credits do contain a number of limitations that mean some taxpayers and electric vehicles won't qualify for the credit — and taxpayers should pay close attention to the details to avoid an unpleasant surprise after buying an electric vehicle.
Expanded Electric Vehicle Tax Credits: The Basics
The Inflation Reduction Act expands the electric vehicle tax credit for electric vehicles placed into service after Dec. 31, 2022 for 10 years, through 2032. Taxpayers who buy qualifying vehicles will qualify for a tax credit of up to $7,500 for new vehicles.
For used electric vehicles, the maximum credit will equal $4,000 or 30% of the vehicle's cost, whichever is less. Used electric vehicles qualify only if they're purchased for personal use, rather than for resale.
The exact amount of the available credit will depend on various factors, including whether minerals in the vehicle's battery are sourced from qualifying countries and where the vehicle is assembled. For example, taxpayers who purchase a vehicle where 40% of the critical minerals used in the battery are sourced from a qualifying country could be eligible for a $3,750 tax credit. Beginning in 2023, half of the battery's components must be assembled or manufactured in North America to qualify for the remaining $3,750 credit.
The percentage limitations will increase over time, which could make it more difficult to find a qualifying vehicle unless manufacturers modify their processes.
The tax credit itself is also expanded so that it covers more types of vehicles, to include any new qualified fuel cell motor vehicle. That means qualifying vehicles are expanded to include more than qualified plug-in electric drive vehicles — for example, hydrogen cell fuel cars will now qualify.
