IRS Guidance on New Electric Vehicle Credits in Inflation Reduction Act

The sweeping legislation signed recently into law by President Joe Biden included expanding the affordability of greener vehicles for US consumers and adjusted the existing tax credit for all-electric cars and hybrid plug-ins. The $7,500 credit was previously authorized in 2008 and 2009 and has now been extended through 2032, with another credit of up to $4,000 for used versions of the eligible vehicles. This is a step in the right direction for EVs, but the legislation is loaded with requirements that severely limits the vehicles that are eligible, at least in the short term.

MSRP threshold for new hybrid plug-ins and all-electric cars

• Sedans must be priced below $55,000; and,
• SUVs, trucks and vans below $80,000

The IRS has issued guidance providing income limits for credit eligibility as follows:

• Single filers with a modified adjusted gross income (MAGI) over $150,000;
• Married filing jointly with a MAGI over $300,000, and;
• Single filing as head of household with a MAGI over $225,000

Limitations for used EVs

Models must be at least two years old to qualify for the credit that amounts to either $4,000 or 30% of the vehicle price, whichever is lower, and the vehicle price cannot exceed $25,000.  Income thresholds on the used EV credits begin with anyone making over $75,000 being ineligible for the credit. Cap for joint filers is $150,000 and single head of household is $112,500.

Assembly and manufacturing location requirements

The vehicle’s final assembly and manufacture or assembly of certain battery components must be done in North America, and 40% of the metals used in the vehicle’s battery must come from North America. Starting in 2027, that number rises to 80%.

Date of purchase

The IRS stated that taxpayers purchasing a qualified EV after August 16, 2022 may claim the credit only if the final assembly of the vehicle in question occurred in North America. Information on the manufacturing location for a specific vehicle is available through the National Highway Traffic Safety Administration VIN decoder which can be found here.

If a taxpayer entered into a written binding contract to purchase an eligible EV before August 16, 2022 but would not take delivery on the vehicle until on or after August 16, 2022 the credit rules in effect before August 16 apply.

Taxpayers that purchase and take delivery on an eligible EV between August 16, 2022 and January 1, 2023 must follow the EV credit rules in effect before the Inflation Reduction Act was in place so long as the final assembly requirements are met.  

 Credit phase-out eliminated

The 2008 and 2009 legislation included a credit phase out once a manufacturer reached 200,000 EVs sold that has been eliminated with the Inflation Reduction Act.

Lack of eligible vehicles

Industry officials are concerned about EV sales as the new EV credit rules under the Inflation Reduction Act could be too strict, potentially hurting sales. The manufacturing and battery parts location and income requirements make nearly 70% of the cars and light trucks sold in the U.S. ineligible for the credit according to the Alliance for Automotive Innovation.

“The credit was created with good intentions, and is heading in the right direction, but with all the restrictions, I’m not sure in the short term how much this  really moves the needle in the widespread adoption of EVs among consumers, said Tom Alongi, national manufacturing practice leader.

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