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A federal tax break that provides electric service to car buyers could be implemented differently starting next year.
A tax credit of up to $7,500 for buyers of new electric cars and plug-in hybrids would be extended through 2032 under the inflation-reduction bill — which passed the Senate on Sunday and is expected to clear the House this week. It also creates a separate tax credit of up to $4,000 for used vehicles.
However, the measure introduces new restrictions on who is eligible for the credit and which vehicles qualify for it.
The tax credit has ‘value and income limits’
“First of all, there are price and income thresholds to qualify,” said Seth Goldstein, senior equity analyst at Morning Start.
For new vehicles, the manufacturer’s suggested retail price must be less than $55,000 for sedans to qualify for the tax credit. The price ceiling for SUVs, trucks and vans will be $80,000.
Additionally, the credit is not available to single taxpayers with adjusted gross income above $150,000. The income limit is $300,000 for couples filing jointly and $225,000 for individuals filing as heads of household.
“We have seen a lot. [electric vehicles] They’re luxury automobiles,” Goldstein said. “And because those buyers are in a higher income bracket, it immediately limits their ability to qualify for the tax credit.”
To qualify for used electric vehicles, the car must be at least two model years old, among other restrictions. The credit is worth $4,000 or 30% of the car’s value – whichever is less – and the price cap is $25,000.
Those purchases come with income ceilings: Individual taxpayers with incomes above $75,000 are not eligible for the credit. It will be $150,000 for joint filers and $112,500 for heads of household.
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Another factor that determines whether a vehicle qualifies for a full or partial credit (or both) includes the requirement that the vehicle’s final assembly take place in North America. Additional standards include restrictions on where key materials for batteries can come from and mandating that a certain portion of battery components be manufactured or assembled in North America.
“It’s designed to encourage domestic production in North America,” said Scott Cockerham, an attorney and partner at Orrick.
Many electric vehicles may not qualify for the credit.
But cars can be difficult to qualify for depending on where they source their materials and where they complete the manufacturing process, he said. The Alliance for Automotive Innovation warns that many electric vehicles won’t qualify for loans right off the bat.
In addition, another change to the law would allow a buyer to transfer a car that qualifies for a tax credit to a dealer, which can reduce the value of the car.
Meanwhile, another amendment included in the bill is good news for some electric vehicle manufacturers.
Essentially, the existing $7,500 credit was authorized by legislation in 2008 and 2009 with the intention of spurring the adoption of electric cars. Part of that includes phasing out the tax credit once a manufacturer reaches 200,000 vehicles sold.
Tesla hit that limit in 2018, meaning their electric cars are currently ineligible for tax credits. General Motors is in the same position. Toyota (including its Lexus brand) has now passed that limit, and its electric cars will no longer be eligible for tax credits after the end of September 2023.
The congressional action would remove that 200,000 sales cap, making their electric cars eligible for the credit again — at least based on the removal of that sales cap.