Tucked inside the massive Inflation Reduction Act of 2022 that was signed into law in August is a complex set of requirements around which EVs and other clean vehicles do and do not qualify for a $7,500 EV tax credit. Tl;dr not all new EVs or other clean vehicles (and even used ones) are created equally in the eyes of Congress and President Biden, who signed the bill into law.
The Inflation Reduction Act (IRA) covers a lot, including a number of climate and energy provisions. It also amends the Qualified Plug-in Electric Drive Motor Vehicle Credit (also known as IRC 30D), which gave consumers up to $7,500 in tax credits for buying a battery electric vehicle and certain plug-in hybrid vehicles. This reworked law, now called the Clean Vehicle Credit, includes a reduced $4,000 credit for used EVs and adds other clean vehicles in the mix, such as "qualified fuel cell vehicles."
Qualifying for the tax credit is another matter. The law includes a number of new requirements that includes personal adjusted gross income, where the EV was assembled and the sticker price, according to Dean Taylor of Dean Taylor Consulting and the Zero Emissions Transportation Association. It also raised the threshold for plug-in hybrids. New PHEVs must have 7 kWh battery packs to qualify for the EV tax credit.
Does that new EV or PHEV you’re eyeing qualify for the EV tax credit?
Here’s a guide to walk you through the EV tax credit process:
Step 1: Where the EV is assembled matters
For consumers buying a new model-year EV or PHEV, start by determining whether the vehicle that you're interested in is assembled in North America. If not, you can kiss that EV tax credit goodbye.
The Clean Vehicle Credit added a new requirement for final assembly in North America that took effect on August 16, 2022.
What if you bought an EV before August 16 and didn't know about this rule, and dang it all to hell, what now? The IRS says that if you entered into a written binding contract to purchase the new qualifying electric vehicle before August 16, but did not take possession of the vehicle until after that date (for example, because the vehicle has not been delivered), you may claim the EV credit based on the old rules that were in effect. Hooray!
What if you bought a new EV after August 16, 2022 and you're not sure where the vehicle was made? Or you plan to buy one and are not sure if it was assembled in the U.S., Europe or Japan?
There is a VIN decoder tool that is operated by the National Highway Traffic and Safety Administration that allows consumers to punch in the vehicle identification number on any vehicle to determine where it is assembled. Once you've entered the VIN, a new page will pop up. Scroll to the bottom to find information on the build plant and country.
It's important to check this, if you can, because some models are built in multiple locations and may not meet the final assembly requirement in all circumstances, according to the IRS.
Today there are 20 new EV models assembled in North America that would qualify, according to a list provided by the Department of Energy. That list should grow over time as manufacturers like VW Group open new factories in the United States.
Just because a model is on that list does not, let me repeat, does not, mean you'll get the credit. Keep reading to learn why.
Step 2: The cap until January 1
Sweet, it's made in North America! But wait. For now, and until the end of 2022, there is another factor that may cause you to delay your purchase.
Some manufacturers that have vehicles assembled in North America have sold 200,000 EVs. That matters because under the old rule there was a 200,000-vehicle cap on the credits. Once a manufacturer hit that cap, the credit would drop by 50% and then eventually to zero. Today, GM (which covers Cadillac, Chevrolet, GMC) and Tesla have reached the manufacturer cap and are not currently eligible for the Clean Vehicle Credit.
That means if you want to buy a new Chevy Bolt today — an EV made in the U.S. — it will not qualify for the Clean Vehicle Credit. But if you wait until January 1, 2023, those old 200,000-vehicle limit rules will disappear and you can once again get that EV tax credit.
Oh, but wait. Yes, another step. Or five.
Step 3: Where the battery components are assembled matters
There is an important nugget on page 366 of the IRA that adds in a battery components requirement starting in 2023.
To kick things off, the law states that after 2023 vehicles will not qualify for the EV tax credit if any components in the battery are manufactured or assembled by a “foreign entity of concern” as defined by the Infrastructure Investment and Jobs Act. A foreign entity of concern includes organizations, governments, certain companies and even people. For instance, Huawei in China is a listed foreign entity of concern.
But there is more.
About half of the full $7,500 credit is based on a requirement focused on whether the battery components are made or assembled in North America. That means to get the $3,750 designated for this requirement the percentage of the value of the battery’s components that were manufactured or assembled in North America has to exceed a certain threshold. And it increases every year.
EVs that go to market before January 1, 2024 must exceed a 40% battery components assembled in North America threshold. EVs that come to market during 2024 have to exceed 50%. And it goes up from there:
60% for EVs that go on sale in 2025
70% for EVs that go on sale in 2026
80% for EVs that go on sale after December 31, 2026
Let's translate that for you. It's 2024 and you're buying an EV that is assembled in North America and 41% of its battery components are assembled in the region as well. Congrats, you've met half of the EV tax credit criteria and will get $3,750.
Let's talk about the other half of the credit.
Step 4: Where the battery materials come from matters
Just like battery components, the law tackles the problematic issue of where the raw materials used in the battery come from.
After 2024, any vehicle with "critical minerals" that were extracted, processed, or recycled in a “foreign entity of concern,” will not qualify for the other half of the $7,500 EV tax credit (so $3,750).
That same year, the law has a percentage requirement for where these critical minerals come from. In short, a certain percentage of critical minerals must be extracted or processed in countries with which the U.S. has a free trade agreement.
The percentage requirement can also be met if they have been recycled in North America. That recycling part is going to become even more important as these percentages increase, meaning big business for startups like Redwood Materials.
The percentage requirements:
40% of critical minerals through end of 2023
50% in 2024
60% in 2025
70% in 2026
80% after 2026
So what is a critical mineral, anyway?
The law has a long list of critical minerals, which includes aluminum, antimony, barite, beryllium, cerium, cesium, chromium, cobalt, dysprosium, europium, fluorspar, gadolinium, germanium, graphite, indium, lithium, manganese, neodymium, nickel, niobium, tellurium, tin, tungsten, vanadium and yttrium. These all have varying minimum purity requirements that range between 80% and 99.9%. There's also a list of minerals that must be distilled to at least 99% purity. Those are arsenic, bismuth, erbium, gallium, hafnium, holmium, iridium, lanthanum, lutetium, magnesium, platinum, praseodymium, rhodium, rubidium, ruthenium, samarium, scandium, tantalum, terbium, thulium, titanium, yttrium, zinc and zirconium.
Step 5: The EV sticker price matters
Price matters, but not until January 1.
New battery electric cars that cost more than $55,000 do not qualify for the EV tax credit. That price threshold rises to $80,000 for new battery electric SUVs, vans or pickup trucks.
And no, there is not an adjustment for inflation.
Step 6: Your income matters
Consumers who find that perfect EV that meets all of the requirements above still have to pass one final hurdle to qualify for the tax credit: an income cap.
Single tax filers are eligible if their income is below $150,000. For heads of households, that income cap rises to $225,000. Joint filers are eligible for the EV tax credit if their income is below $300,000.