The Inflation Reduction Act of 2022 (IRA) introduced the most aggressive climate legislation in U.S. history. One of the act's primary goals is to incentivize the adoption of electric vehicles (EVs) due to their significantly lower carbon footprint compared to gas-powered vehicles, which release zero emissions.

President Biden signed the bill into law on August 19, 2022, allocating more than $369 billion for climate action. A significant portion of this funding bolsters electric vehicle tax credits, offering Americans substantial savings when purchasing EVs.

By 2024, the tax credit structure has undergone updates, expanding its reach and refining its requirements to better promote the transition to clean energy vehicles.

What Is an EV Tax Credit?

An EV tax credit is a federal incentive designed to reduce the cost of purchasing electric or "clean" vehicles. For 2021–2022, the tax credit ranged from $2,500 to $7,500, encouraging consumers to switch to environmentally friendly transportation options.

Under the IRA, the program was revamped and extended through 2032, introducing new eligibility requirements, manufacturing standards, and incentives for used EVs.

How Do EV Tax Credits Work?

EV tax credits allow consumers to reduce their federal tax liability based on the purchase of qualifying electric vehicles.

• Credit Amount: The credit for new EVs ranges from $2,500 to $7,500, depending on the vehicle's make, model, and compliance with new requirements.
• Used EVs: Starting in 2023, used EVs also became eligible for a credit of up to $4,000 or 30% of the vehicle's price, whichever is less.
• Claiming the Credit: Consumers can claim the credit when filing their taxes for the year the vehicle was purchased. The credit is non-refundable, meaning it can only reduce federal tax liability to $0 but will not result in a tax refund.

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: To qualify for the full EV tax credit, part of the vehicle’s battery must be manufactured or assembled in North America. In 2023, at least 50% of the battery components must meet this requirement. This percentage will increase annually by 10%, reaching 100% by 2029. By 2032, only vehicles with fully North American-manufactured or assembled batteries will be eligible for the full $3,750 portion of the credit.
2. Critical Minerals Requirement:The remaining $3,750 of the tax credit depends on sourcing critical minerals used in the battery. These minerals must be extracted or processed in the U.S. or a country with a free-trade agreement. In 2023, 40% of the critical minerals had to meet this requirement, increasing by 10% annually until reaching 80% in 2027, which will remain the standard through 2032. Additionally, starting in 2024, batteries cannot include parts sourced from "countries of concern" (e.g., China). By 2025, this restriction will also apply to critical minerals.

Vehicle Price Limit:

• Sedans: MSRP must be below $55,000.
• SUVs, vans, and trucks: MSRP must be below $80,000.

Income Limits:

• Single filers: Adjusted gross income (AGI) under $150,000.
• Heads of household: AGI under $225,000.
• Joint filers: AGI under $300,000.

Used EV Tax Credit

• Used EVs are now eligible for a tax credit of up to $4,000 or 30% of the vehicle's sale price, whichever is less.
• Vehicles must be at least two years old and purchased for personal use.

Raised Manufacturing Cap
Previously, manufacturers were limited in the number of vehicles eligible for tax credits. The IRA removed this cap, allowing more vehicles from manufacturers like Tesla and General Motors to qualify.

Takeaway

The Inflation Reduction Act continues to make significant strides in promoting clean energy. EV tax credits provide substantial financial incentives for adopting electric vehicles, reducing barriers for consumers while accelerating the transition to a greener economy.

With rising gas prices and the expansion of EV charging infrastructure nationwide, now is an opportune time to consider an electric vehicle. Stay informed about eligibility criteria and consult tax professionals to ensure you maximize the benefits of these incentives when purchasing your next car.