Gas prices seem to have a mind of their own this year. While the Charleston, SC and Roanoke, VA areas weren’t hit the hardest, prices still rose to about $4.60 per gallon this summer.1
After months of global economic volatility impacting prices at the pumps, purchasing an electric vehicle (EV) is becoming more appealing. For example, Teslas are sleek, fun cars of the future, and even major car makers like Toyota, Ford, and BMW are coming out with their own fleets of electric vehicles.
If it’s your dream to never wait in line at the gas station again, the timing couldn’t be better. EVs are in the spotlight thanks to an update in tax credits from the Inflation Reduction Act. To help you be an informed and intelligent consumer, we’ve rounded up everything to know about these recent legislative changes.
What Is The Inflation Reduction Act?
The Inflation Reduction Act was signed into law on August 16, 2022, to bring financial relief to Americans amidst record-high inflation.
While we’re focusing on the EV credits in this article, here are a few other changes you’ll see soon:
- Prescription Drugs: Medicare will now have the power to negotiate the price of some prescription drugs, and out-of-pocket drug costs will be capped for users—$4,000 by 2024 and $2,000 by 2025.
- Insulin: Medicare users will also see a dramatic drop in the cost of insulin, which is set to be maxed out at $35 a month by 2023.
- Corporate taxes: Corporations reporting at least $1 billion in profits can expect a new 15% tax rate and a 1% excise tax on stock buybacks.
- Affordable Healthcare Act: The government subsidies to help lower premiums for users of the federal healthcare marketplace were set to expire at the end of this year. They are now extended through 2025.
- IRS: The IRS is getting more funding over the next decade to help improve customer service and tax enforcement.
There are also several climate change initiatives outlined in the Inflation Reduction Act to reduce carbon emissions by 40% by 2030. A big reason this legislation has been making headlines is the tax credits and incentives for individuals who choose to make greener choices at home.
Before you start test driving and preordering an EV, make sure you’re going to get credit for it by staying on top of these changes.
How The Electric Vehicle Tax Credit Is Changing
Interest in EVs has exploded in recent years. In fact, registration of EVs in America grew 60% in the first few months of 2022.2
Before the latest legislation, taxpayers could be eligible to receive up to $7,500 in tax credits if they purchased a qualifying electric vehicle that met the following requirements:2
- Bought on January 1, 2010, or later
- The vehicle is new and being purchased (not leased)
- A vehicle is an all-electric or hybrid vehicle with an external plug-in recharge source.
- The battery holds at least four kWhs
- The car’s weight rating is up to 14,000 pounds
It’s important to note that not all purchasers have been able to take advantage of the tax credit. Only the first 200,000 EVs sold by any manufacturer are eligible for the tax credit. This makes it difficult for big EV companies like Tesla or Toyota to offer buyers the tax credit incentive.
Made in (North) America
While a $7,500 tax credit is still available for eligible vehicles, the requirements established in the Inflation Reduction Act are strict. New limitations actually make it harder for new vehicle purchases to qualify for the tax credit.
The new credit is split into two parts.
First, 40% of the car battery’s materials must come from the U.S. or a country following the U.S.’s free trade agreement by 2024. Each year, this percentage will increase until it hits 100% by 2029.
Next, the car’s final assembly must happen in North America (Mexico, U.S., or Canada). This rule limits the list of eligible vehicles significantly, but we may see an increase in American manufacturing in the coming years.
Qualifying Used Vehicles
Until now, used electric vehicles weren’t eligible for a tax credit. But with the new legislation, those purchasing a used EV will receive up to $4,000 in credits.
Tax Credit Phase Out
As we mentioned, the current laws phase out tax credit eligibility for manufacturers selling over 200,000 EVs a year. This stipulation will remain in effect until 2023, when the Inflation Reduction Act officially eliminates this vehicle cap.
Does Your Dream Car Qualify?
Unfortunately, the current list of eligible vehicles is limited primarily due to the vehicle assembly requirement. The government keeps a running list of qualifying vehicles, which we recommend referencing before deciding on a new car.
Suppose you’re interested in buying an electric vehicle that would qualify for the tax credit before the Inflation Reduction Act’s changes go into effect. In that case, it’s possible to do so with a written agreement or binding contract. Even if the car is not delivered and purchased until after the new year, you will still be able to take advantage of the old electric vehicle tax credit.
Income and Price Requirements for the EV Tax Credit
For a vehicle to be eligible under the new law, its MSRP must be less than $55,000 for sedans or $80,000 for trucks, vans, and SUVs.2 This price includes all upgrades and add-ons to the vehicle, meaning the final price you pay must be under the price cap.
And if you’re a high-earner, you may want to consider purchasing your EV before the new year. Otherwise, you could be ineligible for the new tax credit.
The Inflation Reduction Act puts an income cap on eligibility for this tax credit at:2
- $150,000 for single filers
- $300,000 for joint filers
- $225,000 for the head of household filers
How to Claim Your Electric Vehicle Tax Credit
Through the end of 2023, taxpayers are responsible for paying or financing the vehicle’s full price. When tax season comes around, purchasers can apply to receive the tax credit on their returns.
But starting in 2024, car buyers will see instant savings. The eligible amount will be taken directly off the sticker price at the time of purchase. If the vehicle qualifies for the entire tax credit, that’s an instant savings of $7,500.
Want an Electric Vehicle? Start Saving Up
Tax incentives or not, electric vehicles don’t come cheap—especially compared to their gas-powered counterparts. The year-over-year price of EVs rose almost 12% this summer, and demand for them remains high.3
If you’re excited to purchase your first electric vehicle, make sure to start setting money aside now as average EV prices exceed $48,000.3 That’s a hefty chunk of change, and it’s essential to consider your options carefully. As the EV market continues to grow, car companies may find ways to offer more affordable options.
Wondering if a new car purchase is the right move for you? Feel free to reach out to our team. We’d be happy to take a look at your current financial picture and future goals.
Partners in Financial Planning provides tax-focused, comprehensive, fee-only financial planning and investment management services. With locations in Salem, Virginia and Charleston, South Carolina, our team is well-equipped to serve clients both locally and nationally with over 100 years of combined experience and knowledge in financial services.
To learn more, visit https://partnersinfinancialplanning.com