While it’s true that electric vehicles (EVs) typically have a higher up-front cost than comparable vehicles with combustion engines, it’s not always possible to compare apples to apples. In some cases, EVs are built with features that aren’t available in their gas-powered counterparts, and some of their benefits can be difficult to put a price tag on.
Federal tax credits and other incentives, however, aim to reduce the ownership costs of EVs, factoring in things like depreciation, resale value, energy consumption, and maintenance costs. In 2010, the federal government implemented a program designed to lower the cost of EVs to be more in line with that of gas-powered vehicles with the goal of incentivizing drivers to consider more fuel-efficient options.
The Inflation Reduction Act of 2022
The previous law had a “sunset clause” that phased out the incentive for manufacturers that had reached 200,000 in vehicle sales. For example, Tesla reached that limit in July of 2018, with General Motors following suit in December of that year. While the maximum tax credit on the purchase of a new EV remains at $7,500, the Inflation Reduction Act of 2022 made sweeping changes to the program, which effectively abolishes the cap on automakers. Here are some of the other changes, the details of which are still being worked out.
- The final assembly of qualifying EVs must take place in North America.
- The purchase price is capped at $55,000 and $80,000 for new cars and new trucks/SUVs, respectively.
- Household income is also an eligibility factor, capped at $150,000 for single taxpayers or those who file separately, $225,000 for heads of household, and $300,000 for joint filers.
- Used EVs are now eligible for a reduced tax credit of $4,000, with several caveats:
- The purchase price cannot exceed $25,000.
- The vehicle must be at least two years old.
- The credit may be claimed only once during the vehicle’s useful life.
- Household income is capped at 50% of that for new car buyers ($75,000 for single taxpayers, for example).
Beginning in 2024, taxpayers can transfer their credit to the car dealer to receive it at the point of sale.
The new law also sets standards for battery packs. Vehicles put into service before January 1, 2024 will need at least 40% of their mineral materials to be sourced in the United States or within a country that has a free-trade agreement with the US. This figure increases by 10% each year, topping out at 80% for vehicles placed in service after December 31, 2026.
How to Determine the Eligibility of an EV Purchase
The US Treasury Department released a preliminary list of eligible vehicles, but because some automakers build the same vehicle at multiple factory locations, consumers are urged to check the vehicle identification number (VIN) of the specific vehicle prior to purchase.
Beginning in 2024, buyers can have the dealer apply the credit to the purchase price of the vehicle – something that was not permissible under the 2010 law. This change will also benefit consumers whose taxes are too low to claim the full credit.
State Incentives
Massachusetts offers additional rebates through their MOR-EV program, for which individual and fleet purchases are eligible. Rebates are $3,500 for new battery or fuel-cell vehicles, and $1,500 for new hybrid electric vehicles, with sale prices capped at $55,000. New Hampshire does not have a comparable incentive program at this time.
Key Takeaways
- The federal tax credit for the purchase of a new EV remains at $7,500, but the eligibility of both purchasers and the vehicles themselves have changed dramatically.
- The Inflation Reduction Act aims to incentivize consumers to purchase EVs that are manufactured or assembled in the United States.
- The $7,500 is a tax credit, not a tax deduction. Consumers are urged to consult with a tax professional to determine their eligibility for the full amount.
