Your Guide to the Electric Vehicle Tax Credit

Electric vehicles — let’s talk about them!

It seems like many of my clients want to jump on the electric vehicle bandwagon now more than ever as they “heard” that they can get money back if they buy EVs. Well, yes and no.

Technically you can say you are getting money back on your tax return when you use the EV Tax Credit to reduce your income tax paid to Uncle Sam which is like having money in your pocket. But to get an actual check from the credit? The quick answer is “no,” and there are a lot of rules to follow.

Let me jump into the Inflation Reduction Act (they really needed to pick a better name as there is already IRA out there in the tax law) regarding EV purchases and credits.

How It Works

The credit can be used from 2022 through 2032 if all the requirements are met for up to $7500 per vehicle. In addition, used EVs also now qualify under the new parameters set for up to $4,000 in tax credit or 30% of the sales price, whichever is lower.

In previous years there was a limit in place for the number of cars that were eligible for the full $7500 sold by a manufacturer, which was capped at 200,000 per automaker. Lower-end vehicles by Chevy and GM are now eligible and dealerships can now offer to take the credit and place it as part of your down payment.

Again, just like money in your pocket but there is a big downside. Just like the ObamaCare Health Insurance subsidies — the credit is not only based on the vehicle (more coming up on that) but you must report that you received the “advance” of the credit on your tax return in the year you made your vehicle purchase.

The downside, if you made too much income you will be required to pay back the credit with your other income taxes.

The Fine Print

Before IRA (Inflation Reduction Rate), any household with any income could take advantage of the credit. Now households earning less than $300,000 (married filing jointly) or $150,000 for unmarried taxpayers would be subject to the reductions in the amount of credit they can receive.

If you purchase a used vehicle the income is set for all taxpayers at $150,000 with the cost of a new vehicle having to be $55,000 or lower. For a van, SUV, or truck it must be no more than $80,000 and the vehicle must be manufactured in the United States.

Many US manufacturers who have a portion of the vehicles built in another country are considered “foreign built” and are ineligible for the credit. Foreign vehicles built in the United States are still eligible — this is where the waters can muddy a bit.

In addition, let’s chat quickly about the battery. Yes, the battery! The MAJORITY of the battery components and materials MUST COME FROM the United States. As of this writing, approximately 6% are from the United States based and 80% are from China.

To Note

The Department of Energy has provided a list of Model Year 2022 and early Model Year 2023 electric vehicles that may meet the final assembly requirement. Because some models are built in multiple locations, there may be vehicles on the list that do not meet the final assembly requirement in all circumstances.

To identify the manufacturing location for a specific vehicle, please search the vehicle identification number (VIN) of the vehicle on the VIN Decoder website for the National Highway Traffic Safety Administration (NHTSA). The website, including instructions, can be found at VIN Decoder.

Big Takeaways

The takeaway? Do your homework and do not purchase your EV based on a probable tax credit.

Check out cars.com or https://www.fueleconomy.gov/ for a full list of vehicle makes and the maximum of eligible credit. But, remember the maximum credit is based on household income!

The tax form has not been released for me to see a draft form to share, but as soon as the Treasury Department and the Internal Revenue Service get it to professionals I’ll ensure I share this information.

To see a complete list of eligible EV vehicles as of the latest updates by cars.com, please visit this link!

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