What Biden's IRA means for EV tax credits

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President Biden's Inflation Reduction Act (IRA) aims to address the deficit as well as inflation, and places a big emphasis on fighting climate change. Part of the legislation revamps the existing EV tax credit, and this change has sparked some confusion. Here's a closer look at how the EV tax credit works for 2023, how the IRA will change it, and which vehicles are eligible.

What exactly are EV tax credits?

A tax credit is money off your final tax bill, in this case for buying a new or used electric vehicle. This credit, which is offered until December 2032, applies to any "clean vehicle," per Kiplinger. The credit can be up to $7,500 for new EVs. The exact amount is determined based on a calculation that takes into consideration things such as the vehicle's sourcing and assembly.

What does the Biden IRA have to do with it?

The IRA that Biden signed into law extended the existing EV tax credit for 10 years. However, it also introduced some notable changes. The new rules under the IRA will apply if your qualifying vehicle was delivered on or after Aug. 16., 2022, or will be delivered in 2023, Kiplinger explains. But if you purchased an EV before the IRA went into effect on Aug. 16, 2022, then you can still get the old EV tax credit for 2022.

Here's a look at some of the major ways the IRA will shift EV tax credits moving forward:

  • Income limits now apply. The IRA imposed income limits on who can claim the EV tax credit. The modified adjusted gross income (AGI) limit for single filers is $150,000 ($300,000 for married couples filing jointly, and $225,00 for those filing as head of household). However, as NPR underscores, this is limit is based on adjusted gross income rather than total income, and "[c]ontributions to a retirement account, among other things, reduce a taxpayer's AGI."

  • There are price caps for cars and SUVs. The EV tax credit will only apply to vehicles that cost less than $55,000 (or less than $80,000 for trucks and SUVs). For used vehicles, the price must be $25,000 or less.

  • Vehicles must be made in the U.S. to be eligible. This will knock some vehicles out of the running, such as the Kia EV6 and Hyundai Ioniq. For other vehicles, it might require some digging to make a determination. NerdWallet recommends checking out the National Highway Traffic Safety Administration's vehicle identification number (VIN) database to determine information on a vehicle's final assembly.

  • There are sourcing requirements for the battery components. Starting as soon as March, a certain percentage of a vehicle's battery also has to be assembled or manufactured in North America, including critical minerals in the batteries, to qualify for the EV tax credit. According to Insider, "[d]ue to this rule, many car manufacturers do not expect their battery and material sourcing to comply, and therefore those cars would only be eligible for half the credit" if they meet some requirements.

  • You can take the EV tax credit as a discount on purchase. Beginning in 2024, it will possible to take the credit as a point-of-sale rebate, meaning the car dealership will simply take that amount off of your purchase and then handle dealing with the IRS. This will eliminate the wait to get your credit.

  • The credit is being offered for used EV purchases. For the first time, used EVs are also eligible for a tax credit. The amount of this credit is less — either up to $4,000 or 30 percent of the vehicle's purchase price, whichever is less. Kiplinger notes that "a previously owned EV can't qualify if it's purchased for resale."

  • The manufacturing cap no longer applies. Previously, credits were reduced and eventually phased out after a manufacturer sold 200,000 vehicles, which made many vehicles — like a Tesla — ineligible for the credit. But as of 2023, that limit is lifted.

Which electric vehicles qualify for the credit?

Things remain in flux, with the IRS not set to offer final guidance on battery requirements until March. This makes it hard to know for sure which vehicles will definitely qualify. According to NerdWallet, this has led to "speculation that certain cars that previously were deemed ineligible in 2023 because they did not meet the sourcing requirements may briefly qualify for a full tax credit from January to March 2023."

If an EV purchase is in your near future and you want to be as close to certain as possible, consider checking the IRS list of new clean vehicles and the IRS list of used clean vehicles that are likely to qualify.

Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week's sister site, Kiplinger.com

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