WHAT ARE THE REQUIREMENTS?

The first requirement is that any electric vehicle must be assembled in North America. If you’re watching this video, this requirement is already in effect [1]. So currently, any vehicle assembled outside of North America does not qualify. From here, the requirements for a new vehicle and used vehicle are different. Starting with the requirements for a new vehicle, from now until the end of 2022, you can qualify for up to $7500 for a new hybrid or electric vehicle. If you purchase an electric vehicle from now until the start of 2023, you would qualify for more of the tax credit the bigger the battery capacity. For a qualifying vehicle, you would get $2917, plus an additional $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours, up to $7500 [2]. So, if you purchase an electric car with a 35 kWh battery, you would get 2917 dollars, plus another 417 dollars for each of the 30 kWh over 5 kWh. That would be 30 times 417 plus 2917, which is 15,427, but the tax credit is limited so $7500. This means even an 18 kWh would max out this credit. This also means nearly all electric cars on the market from today until the end of 2022 will qualify for the full 7500, as long as they are assembled in North America. Hybrids typically come with a smaller battery, so at 417 dollars per kWh, they may not qualify for the full $7500. 

Starting in 2023, the tax credit is instead split into 2 parts, each worth $3750. You can get one or both of these parts, depending on whether or not the vehicle qualifies [1]. The first part has to do with where the materials come from to make the battery and the second is where the battery parts are manufactured. The requirements are a bit confusing because they are designed to push manufacturing towards the US based on some of the technical details of making electric cars and the exact details have not been finalized yet.

Battery Requirements

The first $3750 is based on where materials used to make the battery come from.  The requirement is any vehicle placed in service in 2023 must have at least 40% of the value of critical minerals in the battery come from countries in North America, be recycled in the US, or that have a Fair Trade agreement with the US, of which there are about 20 countries. In 2024 this requirement increases to 50%, in 2025 60%, in 2026 70% and in 2027 it must be 80%.  Also, by 2025, any vehicle with any amount of metals extracted, processed, or recycled from “entities of concern” will no longer qualify. Since most batteries and the materials to make them come from China, who does not have a fair trade agreement with the US, most electric vehicle models won’t qualify for the credit, even if the actual vehicle is assembled in the US. This incentivizes auto manufacturers to change their manufacturing and sourcing locations to the US and other qualified areas.

The second $3750 of the tax credit focuses on where the various battery components are assembled or manufactured.  For vehicles placed in services in 2023, at least 50% of the value of battery components must be manufactured in North America. In 2024 the requirement is 60%, in 2026 70%, in 2027 80%, in 2028 90%, and in 2029 100%. So again, many electric vehicle models will need to change where their battery components come from to qualify. 

So, if your car meets only one of the battery requirements, you could still qualify for half the total tax credit worth $3750.  If you owe $3750 or more in federal income tax, you’ll be able to use the tax credit to eliminate or reduce your federal income tax.

If you owe less in federal income tax than what you qualify for, there is a chance you could earn any remaining amount of the tax credit as a refund. I’ve read through the actual Inflation Reduction Act Bill [1], summary of the bill [3], and amendments to the bill [4]. From how I understand it, it seems the tax credit is in fact refundable for new and used vehicles. As the details of the bill are finalized, it will become more clear. Just be sure to check with a tax professional and with the dealer on what to expect before signing anything.  Going back to our example, if the credit is refundable, and you only owe, let’s say $1000 in federal income tax, and qualify for $3750 for the electric vehicle tax credit, you can use your tax credit to pay the $1000 of income tax and get the remaining $2750 as a refund. If the tax credit is not-refundable, you would only get the $1000 reduction of your federal income tax.  Starting in 2024, you’ll be able to get the credit upfront from the dealer, so you don’t have to wait for tax season to get the credit, so it can directly lower the cost of the car when you buy it. 

MSRP Requirement

In addition to the two battery requirements:

Sedans must have an MSRP of $55,000 or less to qualify, while trucks, vans, and SUVs are capped at $80,000. All of this applies to hybrids as well, as long the battery is larger than 7 kWh and they have a plug. Non-plug-in hybrids don’t qualify.

Also, certain manufactures were previously excluded from the tax credit because there was a cap on the number of vehicles each manufacturer could sell and have the buyer receive the tax credit. This meant cars sold by Tesla and GM no longer qualified for the credit. However, since this cap will be removed, and Tesla and GM are made in the US, they will once again qualify for the tax credit in 2023. After that point, they will need to meet the requirements for battery, as well MSRP. 

Income Requirement 

The income requirement you must meet is based on your modified adjusted gross income or MAGI, which is the amount of income you receive after certain adjustments and deductions. You should talk with a tax professional to figure out what your MAGI is. If you file your taxes as an individual, your modified adjusted gross income cannot be more than $150,000 per year in order to qualify for the tax credit. If you file jointly however, the cap is $300,000 a year and if you file as head of household, the cap is $225,000 [1]. If you exceed these limits, you won’t qualify.