Currently, the tax credit for electric vehicles (EVs) is limited to the first 200,000 customers for each car manufacturer. Tesla and General Motors have already reached that limit and Toyota will shortly. The Inflation Reduction Act eliminates this cap, but requires all electric vehicles be assembled in North America in order to qualify for the tax credit. Any tax credit that is available can be applied at the point of the sale, rather than waiting to file a tax return the following April.
The Electric Vehicles tax credit in the Inflation Reduction Act is up to $7,500 per vehicle, and is split equally into two buckets. The first bucket provides up to half of the tax credit ($3,750) and requires that batteries be manufactured or assembled in North America. In 2023, when the new electric vehicle tax credit becomes effective, 50% of the batteries have to be manufactured or assembled in North America. That increases over time until 2029 when 100% of the batteries must be manufactured or assembled in North America in order to qualify for the tax credit.
The second bucket of up to $3,750 is contingent on where minerals used in the batteries are mined or processed. Beginning in 2023, 40% of these minerals (e.g., lithium, cobalt, and nickel) must be mined, processed or recycled in North America. This increases each year until 2027 when 80% of the battery’s minerals must be mined, processed, or recycled in North America.
It is unclear how quickly electric vehicle manufacturers can develop supply chains to meet these requirements. The US is heavily dependent on China for lithium-ion battery cells (80%) as well as graphite used for battery electrodes. Electric Vehicle manufacturers that can break this reliance on China will have a competitive advantage over EV manufacturers that are unable to do so.
There are also limits on the cost of the electric vehicles and income limits on taxpayers who can qualify for electric vehicle tax credits. EV cars cannot cost more than $55,000 and SUVs and light trucks cannot cost more than $80,000 and still qualify for the tax credit. Additionally, individuals earning more than $150,000 and couples earning more than $300,000 do not qualify for the EV tax credits.
Used electric vehicles sold by a car dealer also qualify for tax credits of up to $4,000 or 30% of the sales price, whichever is less. The sales price cannot exceed $25,000 and the electric vehicle must be at least two years old. Individuals who purchase a used electric vehicle cannot earn more than $75,000 (joint filers $150,000) a year. These tax credits take effect January 1, 2023.