In a year full of high gas prices, volatile markets, and increasing inflation, taxpayers are understandably in need of some good news and financial support. With the recent enactment of the Inflation Reduction Act, taxpayers have the opportunity to relieve some of their tax burdens – all while promoting clean energy.
What Is the Inflation Reduction Act?
The Inflation Reduction Act of 2022 is a law passed by President Biden on August 16, 2022, which aims to bite back on inflation by lowering prescription drug costs, healthcare costs, energy costs and investing in domestic energy production. The law will raise $737 billion and authorize $369 billion in energy and climate change spending. Specifically, the goal of this portion of the bill is to have an impact on the affordability (and potentially the popularity) of electric vehicles.
A New Tax Credit for Electric Vehicles
Under the new law, a tax credit of up to $7,500 is extended through 2032 for buyers of new electric vehicles (EV). In a push to revitalize the supply chain and bring production back to the U.S., the electric vehicle must be assembled and manufactured in North America.
For those looking to purchase an EV, this is excellent news. A tax credit is not a tax deduction; it is a dollar-for-dollar reduction of your tax liability.
New Electric Vehicle Details
Hybrid plug-ins and all-electric cars of all sizes have a manufacturer’s suggested retail price (MSRP) threshold to qualify for the credit under the Inflation Reduction Act. Sedans must have an MSRP below $55,000, and SUVs, trucks, and vans must be under $80,000. Likely, this is to avoid purchasing more expensive or luxury vehicles due to the credit.
In addition to the price restrictions, there are also income limits for eligibility based on modified adjusted gross income (MAGI) for either the year of the purchase or the preceding year. Those who qualify one year but not the other will still be eligible for the credit.
The MAGI limits are:
- Single tax filers with a MAGI above $150,000
- Married tax filers, filing jointly, with a MAGI above $300,000
- Single tax filers, filing as head of household, with a MAGI above $225,000
So, those in high-earning households may not qualify for the tax credit.
Used Electric Vehicle Details
Under this tax credit, the most important requirement for used vehicles is that the used vehicle must be at least two model years old.
The credit amounts to either $4,000 or 30% of the EV’s price — whichever is less — and the price must be less than $25,000. There are, again, income maximums for purchasing a used electric vehicle and receiving a tax credit. Like the new vehicle income limits, the credit refers to both the year of purchase and the preceding year.
The income limits are:
- Single tax filers with an income above $75,000
- Married tax filers with an income above $150,000
- Single tax filers, as head of household, with an income above $112,500
Final Assembly in North America
In order to take advantage of this tax credit, you will need to ensure your vehicle has been assembled in North America. It doesn’t, however, need to be fully assembled there, only the final assembly counts toward the credit.
The U.S. Department of Energy has provided a list of vehicles with Final Assembly in North America. You can use this resource to see a list of Model Year 2022 and early Model Year 2023 vehicles. This will help you determine if you would be eligible to receive the tax credit on a specific vehicle.
Understanding the Impacts
The Inflation Reduction Act of 2022 offers several interesting enhancements to existing credits while adding potentially beneficial new ones. However, this tax credit is only one of the many credits and deductions that are being introduced — and understanding all of them is complicated.
If you wish to understand how the new tax credit may help you, or you are interested in better understanding how emerging tax law changes affect your strategic tax plan, please contact our team.