How the Inflation Reduction Act Impacts EV Tax Credits

THe is now trying to make it harder for electric vehicle owners. Electric vehicles are no longer eligible for the $7,500 federal tax credit which helped millions of customers switch from electric to gas-powered vehicles over the previous decade.

Changes to the tax credit language took effect Tuesday afternoon when President Joe Biden signed into law the Inflation Reduction Act, which includes a number of federal provisions aimed at keeping EVs affordable and limiting China’s influence on the supply chain. Under the new law, in order to qualify for tax credits, buyers must have an income below a certain threshold, the vehicle they select must not exceed a certain price point, and the vehicle’s battery must be made in North America. These requirements, according to auto analysts, will probably prevent buyers from receiving tax credits. This is especially true for wealthy customers. But, this new law should incentivize households with lower incomes to invest in EVs.

“It’s going to change the calculus for total cost of ownership,” says Kevin Roberts, director of industry insights and analytics at CarGurus. “If you are looking for that $7,500 tax credit, this law could change what type of vehicle you’re looking to purchase.”

The legislation on EV tax credits

For the credit to be granted, the most important provision of the legislation is that all electric vehicles must include a North American-made battery with North American minerals. In order to qualify for the tax credit, electric vehicles must contain at least half of their batteries from either Mexico or Canada by 2024. The figure will increase to 100 percent by 2028. This could prove to be problematic for automakers, as the majority of components and minerals used in EV batteries are sourced from China.

The main goal of the climate-energy package was to keep China from entering the global supply chain. This legislation is designed to encourage the production of iron and phosphate in America, rather than relying upon batteries with high amounts of nickel or cobalt from China.

The new law also states that electric vehicle buyers will not be eligible for the credit if their taxable income is above $150,000 or $300,000. For joint filers, the limit on the credit is $400,000 and $250,000 respectively. To qualify for credit, the legislation includes restrictions on vehicle prices. This penalizes more costly EV manufacturers like Rivian and Lucid. The cap for sedans, wagons and hatchbacks is $55,000, while trucks, SUVs and vans are limited to $80,000.

Continue reading: What Experts Say About How Valuable The Inflation Reduction Act’s Green Subsidies Will Be

Roberts suggests that price-related restrictions might encourage some automakers lower their EVs’ sticker prices below $55,000 to $80,000, once there are no supply chain interruptions and more cars on the lot. It all depends on the cost of raw materials, new factories and other factors that are needed to manufacture North American batteries.

Kelley Blue Book currently estimates that an EV’s average cost is $66,000. But, there are some models with half the price. The average price of a Nissan Leaf is $27,800.

How do I qualify for the EV credit?

Given the new restrictions, the vast majority of electric vehicles won’t qualify for the full $7,500 tax credit. Only around 15 EV models currently sold in the U.S. are expected to meet the price requirements, and the companies that manufacture them still have a number of political and financial hurdles to jump in order to build a domestic supply chain that complies with the made-in-North America battery sourcing requirements—meaning it could be a few years until these models are compliant.

Consumer Report’s list includes almost a dozen vehicles that could meet new credit requirements if the batteries were primarily sourced in North America, as outlined by legislation.

It is important to note that buyers may need to choose models with lower-quality trims, depending on which vehicle they are buying. Rivian R1S is priced at $72,500. Upgrades such as perforated or advanced speakers could add up to more than $80,000.

According to John Bozzella, CEO of the Alliance of Automotive Innovation, it may take years for EVs to meet the battery requirements since the kind of infrastructure needed to manufacture North American batteries at a scale similar to China doesn’t currently exist. “The $7500 credit might exist on paper, but no vehicles will qualify for this purchase incentive over the next few years,” he said in a statement. “That’s going to be a major setback to our collective target of 40-50 percent electric vehicle sales by 2030.”

What are the savings you could make on EVs

A tax credit of up to $7500 is available to buyers who have met the income requirements. This program was created to lower the price of electric cars and can be used for plug-in hybrids as well.

The size of the vehicle’s battery will determine how many credits it is eligible for. Base incentive starts at $2,500, and goes up by $417 each 5 kWh battery to reach $7,500. After tax credits, a base Chevrolet Bolt EV priced at $31,500 with a 65kWH battery would be $24,000.

A person’s eligibility for tax credits will depend on their tax debt. To receive the maximum $7,500 tax credits, they need to owe at least that much.

This legislation will also target used electric vehicles. For the first time, credit up to $4,000 is available for pre-owned vehicles that cost $25,000 less than new and are more than 2 years old. It is not necessary for used cars to meet the Made-in-America standards. “That could be a game changer down the road,” Roberts says, even though buying an electric vehicle for under $25,000 is “almost impossible right now” due to high demand. CarGurus data shows that the average car price is $30,863, with a $67,134 difference for Teslas. Auto analysts expect that used EVs will fall to $25,000 in the next 10 year with this legislation.

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