Understanding the Clean Vehicle Credit
On Friday, August 12th, 2022, the Inflation Reduction Act (IRA) was signed into law. The “Clean Vehicle Credit” (CVC) portion of the act includes a rewrite of the previous $7,500 Federal Income Tax credit for the purchase of an electric vehicle, but with more restrictions and a different method of realizing the benefit.
Here’s what you need to know:
The general purpose of the CVC program is to accelerate EV adoption while encouraging domestic EV production and simultaneously reducing reliance on foreign suppliers and materials. While the original tax credit applied to all EVs, the new program favors cars assembled in North America using battery materials originating from Free Trade Agreement countries.
The CVC includes MSRP limits in an attempt to prevent those who don’t need assistance from taking advantage. Cars have a maximum MSRP of $55,000, while SUVs and trucks are capped at $80,000. This means certain lower-tier trims of a vehicle can be eligible while fully loaded vehicles may be excluded.
Additionally, it includes income caps of $150,000 for single filers, $225,000 for heads of household, and $300,000 for couples. The original credit was claimed on the buyer’s income tax return for the year in which they took delivery. This meant it could take up to a year to realize the benefit. Now, the amount is applied at point of sale.
The biggest change is in which vehicles qualify. Under CVC, vehicles must be assembled in North America to be eligible, with increasing restrictions year-over-year on the country of origin for battery materials. To be eligible, the percent of materials sourced from US or Free Trade Agreement countries starts at 40% and increases to 100% over the next 7 years.
Many OEMs whose vehicles become ineligible under the new program quickly invited reservation-holders to convert their refundable reservation payments to non-refundable order payments. This is expected to have locked in their credit eligibility even if those vehicles are not produced or delivered by the time the act was signed into law.
Lastly, the CVC includes a separate credit of up to $4,000 for the purchase of a used EV. Used EVs must be at least two model years old, with a maximum vehicle price of $25,000, and the credit cannot exceed 30% of the vehicle price. Income caps apply here also, except at half of the amounts in the new EV credit—so $75,000, $112,500, and $150,000 respectively.
This is clearly not a broad extension of the $7500 income tax credit, but instead intended to be a catalyst to encourage domestic EV manufacturing from raw materials to finished product.
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