Beginning January 1, many Americans will be eligible for a tax credit of up to $7,500 for the purchase of an electric vehicle. The credits, part of changes enacted in the Inflation Reduction Act, are designed to encourage electric vehicle sales and reduce greenhouse gas emissions.
But a complex web of requirements, including vehicles and batteries that must be made in order to qualify for the aid, is casting doubt on whether anyone can get the full $7,500 credit next year.
The new law also provides for lesser credit for those who buy old electric vehicles.
Some electric vehicles that were eligible for a separate tax credit that began in 2010 and will expire this year may not be eligible for the new credit. Many models of electric vehicles made by Kia, Hyundai and Audi, for example, would not be eligible for the exemption because they are manufactured outside North America.
The new tax break, which runs until 2032, aims to make zero-emissions vehicles affordable to more people. Here’s a more detailed analysis:
news for 2023
The credit will be given up to $7,500 to those who buy certain new electric vehicles, as well as certain gas-electric plug-in hybrids and hydrogen fuel cell vehicles. A $4,000 credit will be given to those who buy a used battery-operated vehicle.
But the question of which vehicles and buyers will be eligible for the credit remains uncertain until the Treasury publishes rules in March.
What is known so far is that new electric vehicles must be manufactured in North America in order to be eligible for the credit. Also, capping vehicle prices and buyer income aims to disqualify wealthy buyers.
From March, battery components will be subject to complex provisions. 40% of the minerals in the batteries would have to come from North America or a country with a free trade agreement with the United States, or be recycled in North America. (Eventually, that threshold will reach 80%).
And 50% of battery parts must be made or assembled in North America, a percentage that can be as high as 100%.
Starting in 2025, battery minerals will no longer be able to come from “foreign entities of concern”, primarily China and Russia. Starting in 2024, battery parts will no longer be able to source from those countries, a major deterrent for the auto industry, as many metals and electric vehicle parts now come from China.
There are also requirements on the size of the battery.
Which vehicles are accepted?
The reasons for which remain are not entirely clear, due to the many uncertainties.
General Motors and Tesla are the companies that assemble the most electric vehicles in North America. But because of requirements about where batteries, minerals and parts must be made, buyers of those vehicles are likely to initially receive only half, $3,750, of the tax break. GM says its eligible electric vehicles should qualify for a $3,750 credit in March, with the full credit available in 2025.
However, until Treasury publishes its own rules, the requirements regulating the origin of minerals and pieces will not apply. This will allow eligible buyers to receive the full $7,500 tax incentive for eligible models beginning in 2023.
The Department of Energy says that 29 EV and plug-in models were to be manufactured in North America in 2022 and 2023. These are Audi, BMW, Chevrolet, Chrysler, Ford, GMC, Jeep, Lincoln, Lucid, Nissan, Rivian, Tesla. , Volvo, Cadillac, Mercedes and Volkswagen. However, not all of these vehicle models will be eligible for the credit, due to price limits or battery size requirements.
and the price?
To be eligible for the credit, the sticker price of a new electric sedan cannot exceed $55,000. Trucks, SUVs and vans cannot exceed $80,000. This would disqualify the two higher-priced Tesla models. Although Tesla’s best-selling models, the 3 and Y, will be eligible, with options, those vehicles may exceed the price range.
Kelley Blue Book says the average electric car costs more than $65,000, although lower-priced models are coming.
Will I be entitled to credit?
It depends on your income. For new EVs, buyers cannot have an AGI of more than $150,000 if filing single, $300,000 if filing jointly, and $225,000 if head of household.
For a used EV, buyers can make no more than $75,000 if filing single, $150,000 filing jointly, and $112,500 if head of household.
How will the credit be repaid?
Initially, this will apply to 2023 tax returns, which are filed in 2024. Beginning in 2024, consumers will be able to transfer the credit to the dealer to lower the price of the vehicle at the time of purchase.
Will credits increase EV sales?
Yes, but it will take a few years, says Mike Fiske, an associate director at S&P Global Mobility. Credit sales are likely to return early next year because of the Treasury’s delay in setting more stringent requirements. But most automakers are already selling all the electric vehicles they make and can’t make more because of a shortage of parts, including computer chips.
In addition, manufacturers may have trouble certifying the origin of battery minerals and parts, requiring buyers to obtain full credit. Automakers are racing to move more EV supply chains to the United States.
How does the credit work for used electric vehicles?
Consumers can receive a tax credit of up to $4,000 for the purchase of electric vehicles that are at least two years old – or 30% of the cost of the vehicle, whichever is less. But a used EV must cost less than $25,000, which is a lot considering the starting prices of most EVs on the market. A search on Autotrader.com shows that the Chevy Bolt, Nissan Leaf and other relatively affordable used EVs are listing at $26,000 or more for models dating back to 2019.
On the other hand, used EVs are not required to be manufactured in North America or meet battery sourcing requirements. This means that, for example, a 2022 Kia EV6 that is not eligible for the new vehicle credit because it is made in South Korea may be eligible for the used vehicle credit if it costs less than $25,000.
Chris Harto, a policy analyst at Consumer Reports magazine, says: “The real impact of these tax credits will occur in the period between 2026 and 2032, as automakers prepare and increase their volumes.”
Why does the government provide this credit?
The credits are part of a $370 billion clean energy spending effort (the largest US investment in the fight against climate change) that President Biden signed in August. Currently, electric vehicles account for about 5% of new vehicle sales in the US; Biden has set himself a target of reaching 50% by 2030.
EV sales are on the rise, especially as California and other states phase out gas-powered cars. The emergence of low-cost competitors to Tesla, such as the Chevy Equinox with an estimated base price of around $30,000, is expected to broaden the reach of EVs in middle-class households. S&P Global Mobility forecasts the EV share of car sales to reach 8% next year, 15% in 2025 and 37% in 2030.
Can the requirements be made more flexible so that more EVs can be accepted?
It is not clear yet. Some US allies are troubled by North American manufacturing requirements that disqualify electric vehicles made in Europe or South Korea.
These requirements put Hyundai and Kia out of credit, at least in the short term. They plan to build new electric vehicle and battery factories in Georgia, but they won’t open until 2025. European Union countries fear that the tax credits will force their automakers to move their factories to the United States.
The Treasury Department said it would release information by the end of the year on the “intended direction” of battery and mineral supply requirements. The easing of rules would make more electric vehicles eligible for the measure in a bid to respond to concerns from US allies. But it also risks increasing America’s dependence on foreign supply chains.
Are there credits for charging stations?
If an EV charger is installed in the house, then credit can be given. The new law restores a federal tax credit that was set to expire in 2021; Provides 30% of hardware and installation costs up to $1,000. Adds the requirement that the charger must be in a low-income or non-urban area. Businesses that install new EV chargers in those areas can receive a tax credit of up to 30%, up to $100,000 per charger.
Residential chargers cost between $200 and $1,000, and can cost several hundred more to install.
Should I buy now or wait?
It is a completely personal decision.
If you’re tired of the volatility of gas prices and are considering buying an EV, you might want to move on. Buying a qualifying EV in January or February could net you a $7,500 tax break, before more stringent requirements take effect in March. There may also be additional state credits.
But if you haven’t decided yet, there’s no rush. Consumers rushing to buy now, with relatively few eligible EVs available, may find themselves with dealer markups. Within a few years, the technology will improve and more EVs will be eligible for credits.
Associated Press Staff Writer Fatima Hussain contributed to this report.
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