Inflation Reduction Act: Will It Increase Electric Vehicle Ownership?

Electric vehicle plugged into a public charger

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The Inflation Reduction Act of 2022 has less to do with inflation and more with climate action. That’s why it’s a boon to advocates of transportation electrification — such as eco-warriors, electric vehicle (EV) enthusiasts and EV and battery manufacturers.

Will it incentivize America enough to go electric?

What Is the Impact of the Inflation Reduction Act in Regard to Electric Vehicles?

The Inflation Reduction Act encourages the sale of new and used EVs in the United States through federal tax credits. It changed the qualified plug-in electric drive motor vehicle credit to clean vehicle credit and added “final assembly in North America” as another eligibility requirement.

Panoramic view of the U.S. Capitol

The vehicle identification number (VIN) is the primary basis for confirming EV’s build location. Using the National Highway Traffic Safety Administration’s VIN decoder is the fastest way to identify details about your vehicle, including its country of manufacture and its build plant.

The main point of the Inflation Reduction Act EV tax credit is to increase the number of EVs on American roads and to strengthen North America’s position as a manufacturing hub for all things EV. However, many new EVs on the market are unqualified because of where they come from. For this reason, the law’s immediate beneficiaries in the EV industry will be leasing companies.

The Inflation Reduction Act’s final assembly requirement applies only to consumers, so businesses can buy EVs partially or entirely produced outside North America and claim the credit. Automakers see this as a profitable opportunity. They can expand their fleets and lease vehicles to aspiring EV drivers at a discount to increase sales, passing the credit on to customers.

If you can’t buy a qualified vehicle, leasing an EV from a third party reduces the cost of driving one and can save you a few hundred dollars a month. Your savings can build up throughout your leasing agreement and may eventually match the tax credit. Taking the lease route is a neat workaround to benefit from the Inflation Reduction Act without owning a qualified green vehicle.

Rendering the credit more achievable through leasing can promote a culture of shared mobility, which may be better for the environment than encouraging everyone to own an EV.

How Does the Inflation Reduction Act EV Tax Credit Work?

The clean vehicle credit for new EVs placed in service on or after April 18, 2023, is $7,500 under the Internal Revenue Service (IRS) Section 30D or 25E. Aside from buying an EV assembled in North America, you must choose a qualified vehicle and be below the income limit.

The Inflation Reduction Act incentivizes you only when you purchase a green vehicle for personal use, primarily in the U.S. Therefore, buying one for resale disqualifies you.

Moreover, the law also divides the $7,500 clean vehicle credit into two. You’ll receive $3,750 if a company in North America manufactures or assembles your EV’s battery components.

Car being assembled by robots

You can claim another $3,750 when your vehicle uses critical minerals recycled in North America or extracted or processed in the U.S. or any country Uncle Sam has a free trade agreement with.

Buying a used plug-in electric or fuel cell vehicle from a qualified dealer entitles you to a used clean vehicle tax credit under the Inflation Reduction Act. You can claim $4,000 or 30% of the sale price — whichever is lower.

Not being the EV’s original owner, not being named a dependent on someone else’s tax return, and not having claimed a used clean vehicle credit in the 3 years before the purchase date make you eligible.

Whether you buy a new or used EV, you must fill out Form 8936 to claim your credit. Use the same information about your vehicle’s qualifications your dealer reports to the (IRS). Otherwise, the tax authority will reject your credit claim because it’s unverifiable.

Clean vehicle credits are nonrefundable. If your credit is higher than what you owe in taxes, you won’t be able to apply the difference to future tax years.

What Vehicles Does the Inflation Reduction Act Cover?

The Inflation Reduction Act’s credits apply to purchased, financed or leased plug-in electric and fuel cell vehicles after December 31, 2022, through December 31, 2032.

The law applies different and fewer rules for qualified new green vehicles purchased in 2022 or before. Qualified EVs bought in 2023 or after must:

  • Cost under $50,000 if it’s a car or under $80,000 if it’s a sports utility vehicle, a van or a pickup truck.
  • Have the maximum capacity to carry less than 14,000 pounds.
  • Have an external charging source.
  • Come from an EV manufacturer in the U.S. whose sales are below 200,000 units.

Regarding used EVs, they must:

  • Have a manufacturer’s suggested retail price of $25,000 or less, including dealer-imposed fees not required by law.
  • Come from a dealer licensed to sell motor vehicles in a U.S. state or territory, an Indian tribal government or an Alaska Native Corporation.
  • Be a model at least 2 years before the calendar year when you purchase.
  • Have at least a 7-kilowatt-hour battery capacity.
  • Have the maximum capacity to carry less than 14,000 pounds.

The law exempts qualified used EVs from meeting the requirements surrounding critical minerals and battery components. However, the credit applies to them only once, so buy a vehicle that hasn’t changed hands after August 16, 2023, to lower your tax liability with your EV purchase.

What Is the Income Limit for EV Tax Credit for 2024?

The Inflation Reduction Act EV tax credits have income caps. When buying a qualified new vehicle, your modified adjusted gross income (AGI) must be below any of these thresholds:

  • $300,000 if you jointly file with your spouse
  • $225,000 if you’re the head of the household
  • $150,000 if you use a different filing status
Woman holding $100 bills

On the other hand, your modified AGI must be at most half of the above income limits when buying a qualified used EV.

Your modified AGI needs to be less than the income limit in the year you take delivery of the vehicle or the year prior to that. If your income is above the threshold in the tax year you become the EV’s legal owner, you can still claim the credit when you make less money the year before.

Will the Inflation Reduction Act Make More EV Owners?

Average consumers can reap the law’s tax benefits only when there’s enough supply of qualified vehicles on the market. It’s early days, so you’ll only know its impact on EV ownership when it ends in 2032.

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