Tax credits for electric vehicles (EV) have been available in some form since 2005, but the system was overhauled as a part of the Inflation Reduction Act. The revamp is meant to encourage domestic manufacturing, but it also made determining eligibility much more complicated.
The first change took effect as soon as President Joe Biden signed the legislation into law in August 2021. The requirements around which vehicles qualify for the credit changed, making some vehicles no longer eligible while adding others to the list. More notably, excluding used EVs, the law also made it so only vehicles assembled in North America qualify for the tax credit, something buyers may need to look up themselves.
On January 1 of this year, a price cap and income restrictions came into effect, further complicating eligibility.
Under the price cap, only used EVs under $25,000, new cars and sedans under $55,000, and new trucks, vans, and SUVs under $80,000 are eligible for the credit. The line between what counts as a car and what counts as a SUV isn't always clear, meaning customers may need to check the IRS website to learn which cap applies to a vehicle they're interested in purchasing.
Unfortunately, the caps shown on that website are also subject to change: in one case, NPR reports that the price cap for a Ford vehicle changed from one week to the next without warning, something the IRS blamed on a typo.
Under the newly introduced income limits, only Americans making a certain amount of money are able to access the tax credit. Households can make a maximum adjusted gross income of $300,000, individuals can make up to $150,000, and heads of household can make up to $225,000.
On the other hand, only buyers who owe at least $7,500 will be able to take full advantage of the tax credit due to how it's distributed. The credit is applied against your tax bill, and you won't receive the excess in a refund.
Yet another restriction on eligibility may come into play starting this March. A certain percentage of the EV's battery components will have to be sourced either from North America or a country with a U.S. fair trade agreement, and some part of the manufacturing and assembly of the battery will have to occur in North America, as well. These restrictions can't apply until the IRS establishes specific rules, something that won't come until March at the earliest.
The takeaway is that buyers have to fit a certain income bracket and will most likely need to check multiple government sites to determine a vehicles eligibility, which still may not be enough. This also doesn't cover the special credits available for business vehicles and the special rules for leased EVs. The most sure way to get an answer is to consult with a tax expert.
On the positive side, things might get much more convenient for buyers come 2024. As of 2024, the credit won't be applied to your tax bill but will instead be available as a rebate against the price of the vehicle at the point of purchase. This means you won't have to wait to determine if the vehicle qualifies, and you'll be able to access the entire $7,500 credit, no matter your tax burden.