The Inflation Reduction Act of 2022, also called the IRA, introduced the most aggressive climate legislation in U.S. history. One of the act's goals is to incentivize the adoption of electric cars because they have a significantly lower carbon footprint than gas-powered vehicles and release zero emissions.

President Biden signed the bill into law on August 19th. The bill allocates more than $369 million for climate action, a portion of which bolsters electric vehicle tax credits. These new tax credits could help Americans save up to $950 annually.

However, it's essential to know how these new tax credits work and what their requirements are to be able to claim them and save money.

What is an EV Tax Credit?

An EV tax credit, or "electric vehicle" tax credit, is a reduction in tax payments for electric or "clean" car owners. For 2021-22, the tax credit ranged from $2,500 to $7,500 and was essentially an incentive from the government to "go green." Eligibility for these credits depended on various factors, which included vehicle weight, ownership, and total cars sold by the manufacturer.

The IRA makes additional changes to the EV tax credit, most of which will begin in 2022 and last through 2032. These changes include new requirements for manufacturing, expanded eligibility for car types, and income thresholds.

How Do EV Tax Credits Work?

EV tax credits are federal incentives designed to reduce the cost of electric vehicles for consumers. These credits are only available for new electric cars purchased in the United States. The credit amount varies depending on the vehicle's make and model and ranges from $2,500 to $7,500.

When purchasing a qualifying EV, the consumer will receive a tax credit equal to a percentage of the vehicle's base price. For example, if consumers buy a qualifying EV for $40,000, they may receive a tax credit of $4,000 (10% of the base price). The consumer can claim the credit when filing their taxes for the year they purchased the vehicle.

The EV tax credit is one of the many incentives available to consumers purchasing electric vehicles. These credits can help consumers offset the cost of buying an electric car and make EVs more affordable.

Changes to EV Tax Credit

Enhanced Credit: Thanks to the IRA, EV tax credits from the previous nine years will extend from 2023 through 2032.

Assembly Requirements: The new EV credit is worth up to $7,500 and comes with two requirements that each account for half of the total credit.

1. Battery Requirements: If you're looking to receive the maximum amount, ensure that a portion of the car's battery is manufactured or assembled within North America. In 2023, at least 50% of the battery must be manufactured or produced in North America. Each year, this percentage increases by 10%. Therefore, starting in 2029 and ending in 2032, the entire battery will need to be manufactured or assembled in North America to be eligible for a total of $3,750.
2. Critical Minerals Requirement: Batteries use critical materials which must be extracted or processed within the U.S. or a country that is in a free-trade agreement. In 2023, this percentage is 40% and then increases by 10% each year to 2027, which remains at 80% through 2032. In addition, in 2024, EVs cannot contain battery parts sourced from countries of concern (i.e., China). In 2025, critical minerals cannot come from countries of concern.

Raised Manufacturing Cap: The manufacturing cap allows only a certain number of manufacturers' vehicles to be eligible. The IRA is lifting the manufacturing cap, allowing more cars from popular manufacturers to qualify.

Used Cars: Now used EVs will be eligible for a tax credit of up to $4,000 and limited to 30% of the price of the vehicle.

Price caps: Starting January 1st, the MSRP of your EV must be below $55,000 for a sedan and $80,000 for an SUV, van, or pick-up truck to be eligible for the tax credit.

Income cap: To maintain eligibility, consumers must have an income under $150,000 ($225,000 for head of household and $300,000 for those filing jointly).

Takeaway

The IRA introduced a lot of climate action to the U.S. legislature, and one of the significant changes for consumers is EV tax credits. As the country installs more charging stations and with the rise of gas prices, the EV tax credits are a great incentive when considering your next vehicle.