Tucked inside massive Inflation Reduction Act of 2022 which was signed in August, is a complex set of requirements around which EVs and other clean vehicles you do and are not eligible for the $7,500 EV tax credit. Not all new EVs or other clean vehicles (and even used ones) are created equal in the eyes of Congress and President Biden, who signed the bill.
The Inflation Reduction Act (IRA) covers many including a number of climate and energy regulations. It also amends the qualifying electric motor vehicle credit (aka IRC 30D), which gave consumers up to $7,500 in tax credits toward the purchase of a battery electric vehicle and some plug-in hybrid vehicles. This revised law, now called the Clean Vehicle Credit, includes a reduced $4,000 credit for used electric vehicles and adds other clean vehicles into the mix, such as “qualified fuel cell vehicles.”
Eligibility for the tax credit is another matter. The law includes a number of new requirements that include personal adjusted gross income, where the EV is assembled and the sticker price, according to Dean Taylor of Dean Taylor Consulting and the Zero Emissions Transport Association. It also raised the bar for plug-in hybrids. New PHEVs must have 7 kWh battery packs to qualify for the EV tax credit.
Does that new EV or PHEV you’re looking at qualify for the EV tax credit?
Step 1: Where the EV is assembled matters
For consumers shopping for a new EV or PHEV model, start by determining if the vehicle you’re interested in is assembled in North America. If not, you can kiss that EV tax credit goodbye.
The Clean Vehicle Credit added a new final assembly requirement in North America that went into effect on August 16, 2022.
What if you bought an electric car before August 16 and didn’t know about this rule, and damn it, now what? The IRS says that if you entered into a written binding contract to purchase the new qualifying electric vehicle before August 16, but did not take possession of the vehicle until after that date (for example, because the vehicle was not delivered), you can claim the EV credit based on the old rules that were in place. Hooray!
What if you bought a new EV after August 16, 2022 and are not sure where the vehicle was manufactured? Or are you planning to buy one and aren’t sure if it’s assembled in the US, Europe, or Japan?
There is VIN Decoder Tool which is run by the National Highway Traffic and Safety Administration, which allows users to punch in the identification number of each vehicle to determine where it was assembled. After entering the VIN, a new page will appear. Scroll to the bottom to find manufacturing plant and country information.
It’s important to check this if you can, as some models are built in multiple locations and may not meet the final assembly requirement in all circumstances, according to the IRS.
Today, there are 20 new EV models assembled in North America that would qualify, according to a list provided by the Ministry of Energy. This list should grow over time as manufacturers like the VW Group open new factories in the United States.
Just because a model is on this list, let me repeat, does not mean you will get the credit. Keep reading to learn why.
Step 2: Limit until January 1st
Sweet, it’s made in North America! But wait. For now and until the end of 2022, there is one more factor that could make you delay your purchase.
Some manufacturers whose vehicles are assembled in North America have sold 200,000 EVs. This matters because under the old rule there was a 200,000 car cap on credits. Once the manufacturer reaches this limit, the credit will drop by 50% and then eventually to zero. Today, GM (which covers Cadillac, Chevrolet, GMC) and Tesla have reached the production limit and are currently ineligible for the clean vehicle credit.
That means if you wanted to buy a new Chevy Bolt today—an electric car made in the U.S.—it wouldn’t qualify for the clean vehicle credit. But if you wait until January 1, 2023, those old 200,000 vehicle limit rules will go away and you can get that EV tax credit again.
Oh, but wait. Yes, one more step. Or five.
Step 3: Where the battery components are assembled matters
There is an important point on page 366 of the IRA that adds a requirement for battery components from 2023.
To kick things off, the law states that after 2023 vehicles will not qualify for the EV tax credit if any components in the battery are manufactured or assembled by a “foreign enterprise of concern” as defined by Law on investment in infrastructure and employment. A foreign person of concern includes organizations, governments, certain companies, and even individuals. For example, Huawei in China is a registered foreign enterprise that raises concerns.
But there is more.
About half of the full $7,500 credit is based on a requirement focused on whether battery components are manufactured or assembled in North America. This means you get $3,750 set aside for this requirement the percentage of the value of battery components that are manufactured or assembled in North America must exceed a certain threshold. And it’s increasing every year.
Electric vehicles that hit the market before January 1, 2024 must exceed the threshold of 40% battery components assembled in North America. Electric cars coming to market in 2024 should exceed 50%. And it goes up from there:
- 60% for electric cars that go on sale in 2025
- 70% for electric cars that go on sale in 2026
- 80% for electric cars that go on sale after 31 December 2026
Let us translate it for you. It’s 2024 and you buy an electric car that is assembled in North America and 41% of its battery components are also assembled in the region. Congratulations, you’ve met half of the EV tax credit criteria and will receive $3,750.
Let’s talk about the other half of the credit.
Step 4: Where the battery materials come from matters
Just like battery components, the law addresses the problematic issue of where the raw materials used in a battery come from.
After 2024, any vehicle with “critical minerals’ that have been extracted, processed or recycled in a ‘foreign enterprise of concern’ will not qualify for the other half of the $7,500 EV (ie $3,750) tax credit.
That same year, the law had a percentage requirement for where these critical minerals came from. In short, a certain percentage of critical minerals must be extracted or processed in countries with which the US has a free trade agreement.
TThe percentage requirement can also be met if they were recycled in North America. This part of recycling will become even more important as those rates increase, which means big business for startups like Redwood Materials.
Percentage requirements:
- 40% of critical minerals by the end of 2023
- 50% in 2024
- 60% in 2025
- 70% in 2026
- 80% after 2026
So what is a critical mineral?
The Act has a long list of critical minerals that it includes aluminum, antimony, barite, beryllium, cerium, cesium, chromium, cobalt, dysprosium, europium, fluorspar, gadolinium, germanium, graphite, indium, lithium, manganese, neodymium, nickel, niobium, tellurium, tin, tungsten, vanadium and yttrium . They all have different minimum purity requirements that vary between 80% and 99.9%. There is also a list of minerals that must be distilled to at least 99% purity. These are arsenic, bismuth, erbium, gallium, hafnium, holmium, iridium, lanthanum, lutetium, magnesium, platinum, praseodymium, rhodium, rubidium, ruthenium, samarium, scandium, tantalum, terbium, thulium, titanium, yttrium, zinc and zirconium.
Step 5: EV sticker price matters
Price matters, but not before January 1st.
New battery electric vehicles that cost more than $55,000 are not eligible for the EV tax credit. That price threshold rises to $80,000 for new battery electric SUVs, vans or pickup trucks.
And no, there is no inflation adjustment.
Step 6: Your income matters
Income matters.
Consumers who find that perfect EV that meets all the requirements above still have one final hurdle to clear to qualify for the tax credit: an income cap.
Tax filers are eligible if their income is under $150,000. For heads of households, the income ceiling rises to $225,000. Joint filers are eligible for the EV tax credit if their income is under $300,000.