A significantly modified update to the Electric Drive Motor Vehicle Credit (IRC Section 30D), went into effect August 17, 2022, and changed this popular tax credit.  As of January 1, 2023, the new Clean Vehicle Credit will go into effect. In this article we outline what you need to know about the updated credit. 

While the previous credit also allowed up to a $7,500 credit for purchasers of eligible vehicles, it included a maximum manufacturing limit for each car manufacturer. That means General Motors and Tesla brand cars were no longer eligible for the credit. The new version of this tax credit is going to remove this cap but adds several new stipulations that will go into effect over time. In addition, the credit has been expanded to include all clean vehicle types, including plug-in hybrids and hydrogen fuel cell vehicles. 

The Department of Entergy (DOE) has given a list of electric vehicles that may meet the updated Electric Drive Motor Vehicle Credit and new Clean Vehicle Credit at https://afdc.energy.gov/laws/inflation-reduction-act. They recommend that taxpayers still confirm that their vehicle meets the new North America assembly requirement.  

• Final Assembly Requirement: While parts may be imported, the final assembly must be completed in the United States as of August 16, 2022.  
• Income limitations: To claim the Clean Vehicle Credit, the Modified Adjusted Gross Income (MAGI) may not exceed these limits as of January 1, 2023: 

• • Single and Married Filing Separately Filers: $150,000 
  • Married Filing Jointly: $300,000 
  • Head of Household Filers: $225,000 

• Purchase Price Limits: Most luxury-level brands or automobiles may be excluded from the credit, with the new purchase price limits taking effect on January 1, 2023. SUVs, vans, and pickup trucks are capped at a MSRP of $80,000, and other vehicles (including sedans and hatchbacks) are limited to a purchase price of $55,000 or less.  
•  New Battery Requirements: The Clean Vehicle Credit puts limits on where battery components may be sourced, and the manufacturing and assembly can occur.  

• • Critical Minerals for the batteries must be ‘extracted or processed in the U.S. or a U.S. free trade partner and recyclable in the United States.’ Starting January 1, 2023, 40% of the battery’s critical minerals must meet this requirement. This percentage rises every calendar year until it reaches 80% in 2027. 
  • Manufacturing or assembly must take place in North America. Fifty percent of the battery components must meet this requirement starting January 1, 2023. This percentage rises every calendar year until it reaches 100% in 2029.  

• Foreign Entity of Concern: Any vehicles with parts sourced from a ‘foreign entity of concern’ are disqualified from receiving the credit beginning January 1, 2024. The IRS has not yet released guidance on determining which entities or countries are on this list. The following year, batteries may no longer source critical minerals from these foreign entities of concern. 
• Dealership Transfer of Credit: Beginning January 1, 2024, taxpayers can transfer their credit to a dealership for qualifying vehicles instead of waiting to claim the credit at tax time.  
• Used Vehicle Credits: Purchasers of eligible used vehicles can take up to a $4,000 credit on their taxes if they meet the eligibility requirements. Vehicles purchased for resale do not qualify, and taxpayers must have an AGI of less than: 

• • Single Filers: $75,000 
  • Married Filed Jointly: $150,000 

Existing Contracts May Get to Choose Their Credit 

Suppose you are one of the taxpayers that signed a purchase contract before August 16, 2022 but did not take possession until after August 16, 2022. In that case, you may have the opportunity to choose to use the updated Electric Drive Motor Vehicle Credit rules or be grandfathered into the old tax credit qualifications. This could benefit vehicles by manufacturers that have previously reached their manufacturing cap or for vehicles that do not meet the final assembly requirement. The National Highway Traffic Safety Administration (NHTSA) has a VIN decoder to see if the vehicle qualifies for tax credits. 

California Incentives for Clean Vehicle Purchases 

The State of California does not have a comparable tax credit but offers rebates for purchases of qualified ‘clean vehicles.’ The rebate amounts range from $750 to $7,000 depending on the vehicle and the Manufacturer Suggested Retail Price (MRSP). In addition, low-income families can add up to $2,500 to the rebate for purchasing an eligible vehicle. View the list of vehicles eligible for the California rebate here.  

To review your tax planning and whether a clean vehicle purchase would be advantageous, reach out to our team of knowledgeable tax professionals to schedule an appointment.