With the Clean Vehicle Credit, under the Inflation Reduction Act, not only do you have a chance to save money on gas by purchasing an electric car, but this credit is a dollar-for-dollar credit that can reduce taxes you may owe and potentially lower your taxes owed by up to $7,500.
Guidance for Vehicles Purchased in 2022
New electric vehicles purchased prior to the Clean Vehicle Credit were eligible for a tax credit up to $7,500. Under the Inflation Reduction Act, people are still eligible for a tax credit up to $7,500, but it has been expanded to for the first starting January 1, 2023 people who purchase used electric vehicles may be eligible for a credit up to the lesser of $4,000 or 30% of the sales price of the vehicle depending on their income.
For vehicles purchased after August 16, 2022, only vehicles for which final assembly occurred in North America qualify. The U.S. Department of Energy has released a list of model year 2022 and 2023 vehicles with final assembly in North America.
If you ordered an electric vehicle before August 16, 2022 and took delivery of your vehicle at a later date you may still be able to claim tax credits for a vehicle not assembled in North America if you had a written binding contract to purchase the vehicle. The Internal Revenue Service (IRS) defines a “written binding contract” as a nonrefundable deposit or down payment of at least 5% of the purchase price.
Guidance for Vehicles Purchased Starting in 2023
Most of the changes are effective with electric vehicles purchase starting January 1, 2023. The major difference is that effective August 17, 2022 final assembly in North America is required.
The maximum of up to $7,500 is the sum of two amounts: the critical minerals amount and the battery components.
- Critical Minerals ($3,750): Starting in 2023, to qualify for this portion of the credit, at least 40% of the value of the battery’s applicable critical minerals must have been extracted or processed in the United States (or in a country with which the United States has a free trade agreement) or recycled in North America. The 40% amount increases by 10% each year until it reaches 80% in 2027 and thereafter.
- Battery Components ($3,750): Starting in 2023 to qualify for this portion of the credit, at least 50% of the value of the battery’s components must have been manufactured or assembled in North America. The 50% amount increases by 10% each year from until it reaches 100% in 2029 and thereafter.
Some other changes to the credit starting in 2023 include:
- Manufacturer’s suggested retail price for vans, sport utility vehicles, and pick ups is limited to $80,000 and other cars are limited to $50,000.
- For new cars, modified adjusted gross income cannot exceed $300,000 married filing jointly, $225,000 head of household, $150,000 single.
- For used cars, modified adjusted gross income cannot exceed $150,000 married filing jointly, $112,500 head of household, $75,000 single.
- New reporting requirements to include reporting the both taxpayer and seller vehicle identification number (VIN) reporting.
- If you purchase an electric vehicle in 2024 you will have the option to transfer the credits to dealers, and allow the credit to be applied at your point of sale when making the purchase.
- For business owners, the Inflation Reduction Act also adds a tax credit of up to $7,500 for new commercial clean vehicles placed in service after December 31, 2022.