Cut Inflation Act Extends $7,500 Electric Car Tax Credit

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A federal tax break offered to car buyers to go electric could work differently starting next year.

Under the Inflation Reduction Act – which received Senate approval on Sunday and is expected to be approved by the House this week – a tax credit worth up to $7,500 for home buyers new all-electric and plug-in hybrid cars would be extended to 2032. The bill would also create a separate tax credit worth up to $4,000 for used versions of these vehicles.

Yet the measure would also introduce new limits on both who can benefit from the credit and which vehicles are eligible for it.

The tax credit has “price and income restrictions”

“First, to be eligible, there are price and revenue restrictions,” said Seth Goldstein, senior equity analyst at Morningstar.

For new vehicles, the manufacturer’s suggested retail price for sedans should be less than $55,000 to qualify for the tax credit. For SUVs, trucks, and vans, that price cap would be $80,000.

Additionally, the credit would not be available to single filers whose modified adjusted gross income is greater than $150,000. For married couples filing jointly, this income limit would be $300,000 and for individuals filing as head of household, $225,000.

“What we have seen is that many [electric vehicles] are luxury automobiles,” Goldstein said. “And the buyers of these are in higher income brackets, which immediately limits the possibility of qualifying for the tax credit.

For used electric vehicles to be eligible, the car should be at least two model years old, among other restrictions. The credit would be worth $4,000 or 30% of the price of the automobile – whichever is lower – and the price cap would be $25,000.

These purchases would also come with income caps: individual filers with incomes over $75,000 would not be eligible for the credit. This cap would be $150,000 for joint filers and $112,500 for heads of families.

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Another determining factor in whether a vehicle would qualify for full or partial credit (or neither) includes a requirement that final assembly of the car be done in North America. Additional qualifiers include limitations on where key materials for batteries come from and a mandate that a specific portion of battery components must be manufactured or assembled in North America.

“It’s designed to encourage domestic production in North America,” said Scott Cockerham, attorney and partner at Orrick.

Many electric vehicles may not qualify for the credit

However, it could be difficult for cars to qualify, he said, depending on where they source materials from and complete the manufacturing process. The Automotive Innovation Alliance has warned that many electric vehicles will not be eligible for credit from the outset.

Additionally, another change in the law would allow a car buyer eligible for the tax credit to pass it on to the dealership, which could then lower the price of the car.

Meanwhile, another change included in the bill is good news for some electric vehicle manufacturers.

Basically, the existing $7,500 credit was authorized in 2008 and 2009 legislation in an effort to spur the adoption of electric cars. Part of this included a phasing out of the tax credit once a manufacturer reached 200,000 vehicles sold.

Tesla hit that threshold in 2018, which means its electric cars aren’t currently eligible for the tax credit. General Motors is in the same situation. Toyota (including its Lexus brand) has also crossed this threshold, and its electric cars should not be eligible for the tax credit after its phase-out ends in September 2023.

The Congressional measure would eliminate that 200,000 sales cap, making their electric cars eligible for the credit again — at least based on removing that sales threshold.