The Inflation Reduction Act, the sweeping climate and health care law President Biden recently signed, makes the largest ever federal investment in fighting climate change, orders Medicare to negotiate lower drug prices, and ensures that large companies pay at least 15 percent income tax, among other changes. But the new law also includes tax credits for purchasing new and used electric vehicles, with several stipulations. Here's a brief guide to buying an EV with IRA rebates.
How much are the tax credits and when do they become available?
The $7,500 tax rebates for eligible new electric vehicles are already available, and the new $4,000 credit for certain used EVs takes effect in 2023. But there are quite a few qualifications.
First, as of Aug. 16, the credits only apply to vehicles assembled in North America. And starting in 2023, the law sets income caps, price limits, and manufacturing rules designed to get electric cars and trucks that are substantially made in North America into the hands and garages of middle-class Americans.
Americans who buy eligible EVs in 2022 and 2023 will have to claim the credit when they file their tax returns, but starting in 2024, the Treasury Department says in its FAQ on the tax credits, "the Inflation Reduction Act establishes a mechanism that will allow car buyers to transfer the credit to dealers at the point of sale so that it can directly reduce the purchase price."
Who can claim the tax credit?
The tax credits for new EVs are available to individuals whose gross adjusted income is less than $150,000 a year or households that earn up to $300,000. For used hybrids and electric vehicles, that income cap drops to $75,000 for individual filers or $150,000 for households. People who file as heads of household can earn up to $225,000 for a new EV or $112,500 for a used EV.
Which cars and trucks are eligible for the rebates?
Starting in 2023, the tax credits will apply only to electric and hydrogen fuel cell cars and trucks, and some plug-in hybrids, assembled in North America that cost less than $80,000 for trucks and SUVs or $55,000 for cars. The Energy Department has a list of 31 2022 and 2023 models that should qualify for the tax credit, and Consumer Reports has its own rundown. But many popular EV models are either too expensive to qualify for the tax credit or were assembled in Europe, Japan, or South Korea.
You can check to see if a particular EV is eligible by typing its 17-character Vehicle Identification Number (VIN) into the National Highway Traffic Safety Administration's VIN Decoder tool. That will tell you which plant the vehicle was assembled at and the sources for its constituent parts.
For the rest of 2022, consumers are still limited by a previous rule that phases out tax credits for automakers that have sold more than 200,000 EVs in the U.S., meaning GM, Toyota, and Tesla are still ineligible. But that rule ends on Jan. 1, 2023.
Used electric vehicles — eligible for a $4,000 credit or 30 percent of the sale price, whichever is lower — can only be purchased at a dealership. They can't cost more than $25,000 and have to be at least two years old.
Things get more complicated when it comes to batteries.
What about the batteries?
"Under the law, an electric vehicle must contain a battery built in North America with minerals mined or recycled on the continent," The Associated Press explains. "And those rules become more stringent over time." By 2024, 40 percent of the materials in the batteries have to be sourced from North America or a country linked to the U.S. through a free trade agreement, and that quantity rises to 80 percent by 2027 and 100 percent by 2029.
If the automaker doesn't meet the sourcing requirement, the credit drops to $3,750. And if the battery isn't manufactured in North America — 50 percent of its value at first, rising to 100 percent in 2029 — the rest of the tax credit disappears.
And there's more. "Starting in 2024, if any minerals or components are sourced from 'foreign entities of concern,' including China or Russia, the vehicle will not qualify for any tax credit," Consumer Reports notes. "An analysis this year of the EV supply chain from the International Energy Agency shows that the vast majority of minerals, components, and battery cells are currently sourced from China." The world's top producer of cobalt, another key EV battery component, is the Democratic Republic of Congo.
This all "means huge, wrenching changes to the battery supply chain have to happen over the next seven years if these tax credits are going to benefit EV consumers in the long run," Mashable points out.
Why did lawmakers make things so complicated?
Sen. Joe Manchin (D-W.Va.), a key negotiator of the Inflation Reduction Act, "has expressed skepticism of incentives for electric vehicles, which are already selling out of showrooms while remaining too expensive for middle- and lower-income drivers," The Washington Post explains. "He has also expressed concern that China controls so much of the production line."
The general idea behind the new EV credits "is to incentivize domestic manufacturing and mining, build a robust battery supply chain in North America, and lessen the industry's dependence on overseas supply chains that could be subject to disruptions," AP reports. Right now, automakers and their trade groups say, almost no EVs meet all the requirements, the Post adds, "but the measure also includes billions of dollars in new government investment to help companies move their supply chains."
Will the incentives work as envisioned?
It depends largely on whether automakers can — and choose to — source battery materials from eligible countries and build the batteries in North America. The tax credits give them thousands of good reasons to try. "The No. 1 obstacle to EV adoption is cost," Michelle Krebs, executive analyst with Cox Automotive, tells AP. "So a $7,500 difference is significant on one vehicle compared to another for the part of the market that this is aimed at."
But demand is already outstripping supply on some electric vehicles, and getting to a point where there are enough EVs that meet the IRA's tax credit rules will take some work.
"Unfortunately, in the short term, this change to the tax credits makes an already challenging EV market even more challenging," says Chris Harto, senior policy analyst for transportation and energy at Consumer Reports. "Over the longer term automakers will adjust, bring their EV and battery manufacturing supply chains to North America, and ensure that American tax dollars are going to support American jobs."
"Having these goals is a good thing," Morgan Bazilian, director of the Payne Institute at the Colorado School of Mines, tells the Post. "If we put these ambitious — even heroic — targets into the bill and nobody is able to meet them, there is flexibility for agencies to adjust them later."
Is it better to buy an electric vehicle now, or wait?
"If you're interested in an EV or a plug-in hybrid and it qualifies for a tax credit today, don't wait, because it might not qualify next year," says Jake Fisher at Consumer Reports' Auto Test Center. "But if you're considering a used EV, it might be worth waiting."
"We're in a turbulent time of rapid change in the market," CR's Harto advises. "There's going to be more vehicles, there's going to be cheaper vehicles in the future. Eventually, a lot of vehicles are going to qualify for the credit again, so there's not a whole lot of risk in waiting to buy an EV," especially with the current "long wait times and just frankly, absurd dealer markups on EVs," he added. "It's not going to do you a whole lot of good to get a $7,500 tax credit if the dealer is going to charge you [$10,000] or $20,000 over MSRP for the vehicle."
In the end, these new EV incentives are "likely to be a massive improvement over the existing tax credit system," Harto predicts. "It will really help middle-class Americans afford EVs. They just may have to wait for a couple more years."