How the Inflation Reduction Act Affects Electric Vehicle Tax Credits

The insists incentivizing electric vehicle ownership just got a little harder. Most electric vehicles are no longer eligible for the full $7,500 federal tax credit that has helped millions of buyers reduce the cost of switching from gas-powered vehicles to electric over the past decade.

Changes to the tax credit language took effect Tuesday afternoon when President Joe Biden signs the Inflation Reduction Act, which includes a number of federal regulations aimed at keeping EVs affordable and limiting China’s influence over the supply chain. Under the new law, to qualify for the tax credits, buyers must have an income below a certain threshold, the vehicle they choose must not exceed a certain price, and the vehicle’s battery must be made in North America. Auto analysts say these requirements are likely to block some buyers from getting tax credits, especially those who are wealthier, but the new legislation is expected to encourage lower-income households to buy electric cars in the near future.

“This will change the total cost of ownership calculation,” says Kevin Roberts, director of industry insights and analytics at CarGurus. “If you’re looking for that $7,500 tax credit, this law could change what type of vehicle you want to buy.”

What the legislation says about EV tax credits

The most important provision is that electric vehicles must contain a battery manufactured in North America with minerals mined or recycled on the continent to qualify for the tax credit. The legislation calls for at least 50% of EV batteries to come from the US, Canada or Mexico by 2024, with that figure rising to 100% by 2028. This could be a challenge for some carmakers, as -most of the minerals, components and battery cells are currently sourced from China.

When lawmakers drafted the climate and energy package, one of the main emphases was yes freeze china outside the supply chain. The legislation aims to boost production of raw materials such as iron and phosphate in the US, rather than relying on batteries that contain high levels of nickel and cobalt, which are imported from China.

Also, under the new law, electric vehicle buyers can’t get the credit if they have taxable income above $150,000, or $300,000 for joint filers. The legislation also includes limits on vehicle prices to qualify for the credit, penalizing more expensive EV makers like Lucid and Rivian, with a cap of $55,000 for sedans, hatchbacks and station wagons and $80,000 for trucks, SUVs and vans.

Read more: What experts are saying about how valuable the Deinflation Act’s environmental subsidies will be

Those price restrictions could encourage some automakers to drop the sticker price of their EVs below $55,000 or $80,000 once supply chain disruptions subside and more vehicles are on dealer lots, Roberts said. . But it all depends on how expensive the raw materials and new factories needed for North American-made batteries are for automakers.

Currently, the average price of an EV is about $66,000, according to Kelley Blue Book, although some models cost half that. A new Nissan Leaf, for example, starts at $27,800.

Which cars qualify for EV tax credits?

Given the new restrictions, the majority of electric vehicles will not qualify for the full $7,500 tax credit. Only about 15 EV models currently sold in the U.S. are expected to meet the price requirements, and the companies that make them still have a number of political and financial hurdles to overcome to build a domestic supply chain that meets the standards – North American Battery Supply Requirements – which means it may be a few years before these models become compatible.

List of User report includes nearly a dozen vehicles that would qualify for the new credit if their batteries were sourced primarily in North America, as specified in the legislation: Cadillac Lyriq, Chevrolet Blazer EV, Chevrolet Bolt, Chevrolet Bolt EUV, Chevrolet Silverado EV, Ford F -150 Lightning, Ford Mustang Mach-E, Nissan Leaf, Rivian R1S, Rivian R1T, Tesla Cybertruck, Tesla Model 3, Tesla Model Y and Volkswagen ID.4.

However, buyers should note that they may need to choose models with less premium trim to stay under the relevant price limits depending on the vehicle type. The Rivian R1S starts at $72,500, for example, but with upgrades like advanced speakers or perforated seats, it can cost well over $80,000.

According to John Bozella, CEO of the Alliance for Automotive Innovation, it could take years for EVs to meet battery requirements because the kind of infrastructure needed to produce batteries in North America on a scale similar to that in China is currently does not exist. “The $7,500 credit may exist on paper, but no vehicle will be eligible for this purchase incentive for the next few years,” he said in a statement. “This will be a major setback to our overall goal of 40-50 percent electric vehicle sales by 2030.”

How much money can you save on electric cars?

Buyers who meet the income requirements and choose an electric vehicle that meets the battery and price restrictions are eligible to receive up to $7,500 from the government in the form of a tax credit. The program began in 2010 as a way to reduce the cost of clean energy vehicles and is available for both pure electric vehicles and hybrid cars.

However, the amount of credits a vehicle qualifies for depends on the size of its battery. The base incentive is $2,500 and increases another $417 for every 5 kWh battery for a total of $7,500. A base-level Chevrolet Bolt EV, starting at $31,500, which has a 65 kWh battery, will cost $24,000 after the tax credit.

The amount of tax credits a person will receive also depends on how much tax they owe; if the car someone bought qualifies for up to $7,500 in tax credits, they must owe that amount or more to get the full credit

The new legislation also targets used electric vehicles that first qualify for a credit of up to $4,000 if the used vehicle costs $25,000 or less and is more than two years old. Used vehicles do not have to qualify for American production. “This could be a game-changer in the future,” Roberts says, although buying an electric vehicle for under $25,000 is “almost impossible right now” because of high demand. The average price of a used car is $30,863, but that figure jumps to $67,134 for used Teslas, according to data from CarGurus. Over the next 10 years with the legislation in place, automotive analysts predict that used EVs will drop to under $25,000.

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Write to Nick Popley at [email protected].

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