There’s good and bad news if you’re in the market for an electric or plug-in hybrid electric vehicle.
The good news is that the newly enacted Inflation Reduction Act includes a wholly revamped tax credit for electric vehicles that starts in 2023 and continues through 2032.
The bad news is that the credit, now called the “clean vehicle credit,” comes with many new restrictions.
The clean vehicle credit remains at a maximum of $7,500. But beginning in 2023, to qualify for the credit,
• you will need an adjusted gross income of $300,000 or less for marrieds filing jointly or $150,000 or less for singles; and
• you will need to buy an electric vehicle with a manufacturer’s suggested retail price below $80,000 for vans, SUVs, and pickup trucks, or $55,000 for other vehicles.
But that’s not all. The 2023-and-later credit includes new domestic assembly and battery sourcing requirements.
The new law reduces or eliminates the credit when the vehicle fails the battery sourcing requirements. Currently, no electric vehicle will qualify for the full $7,500 credit. Manufacturers are working feverishly to change this, but it could take a few years.
The new credit is not all bad—it eliminates the cap of 200,000 electric vehicles per manufacturer. Thus, popular electric vehicles manufactured by GM, Toyota, and Tesla can qualify for the new credit if they meet the price cap and other requirements.
And then, starting in 2024, you can qualify for a credit of up to $4,000 when purchasing a used electric vehicle from a dealer (not an individual). But income caps also will apply to this credit.
Also, starting in 2024, you’ll be able to transfer your credit to the dealer in return for a cash rebate or price reduction. This way, you can benefit from the credit immediately rather than waiting until you file your tax return.
If you are locked out of the new credit because your income is too high or you wish to purchase a too-expensive electric vehicle, consider buying a qualifying electric vehicle (assembled in North America) on or before December 31, 2022.
If you buy an electric vehicle for business use in 2023, you have a second option: the commercial clean vehicle credit.
In conclusion, the rules are very complicated, so talk to a tax professional about electric vehicle credits before buying one!
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.