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How New Eligibility Criteria for the Electric Vehicle Tax Credit Affects You

Posted 12/15/2023

Opting for an electric vehicle and leveraging the EV tax credit to help with your next electric vehicle purchase is a smart move. There are various opportunities available to help offset the expenses linked with transitioning to electric vehicle. One such incentive is the Clean Vehicle Credit, a key component of the Biden administration's Inflation Reduction Act. This incentive will extend until December 2032, offering a substantial credit of up to $7500. This tax credit is applicable to qualifying clean vehicles placed into service within the current year, and it's claimed in the year you take delivery. Moreover, beginning on January 1, 2024, consumers can have direct access to the tax credit at the point of sale, similar to a rebate, which simplifies the process and makes it more accessible for those considering an electric vehicle investment. As the electric vehicle industry undergoes continuous growth, policy changes remain a constant. A recent announcement highlights the IRS's adjustment of eligibility criteria for manufacturers to qualify for the EV tax credit, effective from January 2024. To streamline your understanding, here's a simplified breakdown of what you need to know. 

Existing Requirements for the Clean Vehicle Credit

Getting a $7,500 tax credit for a new vehicle purchase is an exciting opportunity, but it's crucial to note that new EV purchases come with stringent eligibility criteria. New EVs that are leased, however, offer much more flexibility in their qualifications. Here's a breakdown of the requirements for purchased EVs: 

  • First and foremost, for any incentive eligibility, new EVs must undergo "final assembly" in North America. 

  • Initial $3,750 Tax Credit: If you want to secure the first half of the tax credit, your new vehicle's battery components need to be made or assembled in North America. This percentage will increase every year, beginning in 2024.

  • Next $3,750 Tax Credit: For the second half of the credit, a portion of critical minerals in your battery must come from the U.S. or a U.S. free-trade agreement partner country. Alternatively, these critical minerals can be made from recycled materials in North America. This percentage will increase every year, beginning in 2024.

  • Vehicles must not exceed an MSRP of $80,000 for vans, sport utility vehicles (SUVs), and pickup trucks; or $55,000 for all other vehicles.

In addition, your modified adjusted gross income (AGI) must not exceed $300,000 for married couples filing jointly, $225,000 for heads of households, or $150,000 for all other tax filers. View IRS instructions for claiming credit.

New Requirements for the Clean Vehicle Tax Credit 

But there's more. Starting in 2024, to reinforce America's supply chain security, a clean vehicle must not incorporate any battery components produced or assembled by a Foreign Entity of Concern (FEOC). And from 2025 onwards, eligible clean vehicles cannot utilize critical minerals obtained from extraction, processing, or recycling conducted by an FEOC. An interim exception exists for specific battery materials that pose challenges in tracing their origins, allowing companies some time to make necessary adjustments.  The Department of Energy laid out specific language into what constitutes a FEOC. According to the document,  

  • An ineligible entity must be incorporated, headquartered, and operating within one of the covered nations.  

  • The government of that nation must control at least 25% of a company's voting or equity interests or board seats, regardless of where the company is physically located.  

  • Companies outside a covered nation but with contracts or technology licenses from it must "retain certain rights over their operations" to stay eligible. 

Simply put, this means if a manufacturer is mostly based in countries such as North Korea, China, Russia, or Iran, they won't qualify for the tax credit. 

Which Vehicles Are Now Disqualified from the EV Tax Credit? 

Electric vehicles under manufacturers such as BMW, Nissan, Rivian, Hyundai, Volvo, and Volkswagen will be ineligible or only partially eligible for the EV tax credit as they do not produce their battery components in the United States.   As per a Consumer Reports study, certain electric vehicles no longer qualify for the EV tax credit due the newly introduced restrictions. The affected models include the Audi Q5 TFSI e Quattro PHEV, BMW 330e sedan, BMW X5 xDrive45e SUV, Genesis GV70 Electrified SUV, and Volvo S60 PHEV. Tesla has also cautioned buyers about potential reductions in tax credits after December 31.  The IRS offers a Clean Vehicle Credits webpage with more information on vehicle eligibility for all EV tax credits. 

Why Did the EV Tax Credit Change? 

As the global electric vehicle industry expands, the Biden administration has made fostering the growth of electric vehicles within the United States a top priority. This emphasis on domestic investments stands as a cornerstone of the Inflation Reduction Act, passed by Congress in 2022.   Despite the emergence of new foreign players, significant strides in electric vehicle manufacturing are taking place in the United States. This strategic focus aligns with the Biden administration's steadfast commitment to meeting renewable energy goals and driving the expansion of electric vehicles.  According to the Department of Energy, the projected electric vehicle battery manufacturing capacity in North America is projected to be nearly 20 times greater in 2030 than in 2021.  These battery plant projects are expected to start production between 2025 and 2030. By 2030, the increased production capacity is likely to support the manufacturing of approximately 10 to 13 million all-electric vehicles each year. Automotive hubs in the United States, such as Michigan and Georgia, will see expansion as these new battery plants are strategically placed near automotive facilities to streamline assembly processes. This move is set to contribute to the growth of the United States automotive industry.  As of 2022, there are 230 Hybrid & Electric Vehicle Manufacturing businesses in the US, reflecting a 9.4% increase from 2021, according to IBISWorld. With the expanding manufacturing efforts in the United States, coupled with increased investments from car manufacturers and support from the U.S. government, incentives related to electric vehicles are likely to prioritize American investment. 

Future Outlook of the EV Tax Credit 

Looking ahead, in the next decade, the requirements for the EV tax credit will change. Each year, the percentages for battery components and critical minerals will increase, encouraging a shift to manufacturing these parts in North America. By 2029, all eligible clean vehicles must have their entire battery made or assembled in North America.  In the rapidly growing EV industry, staying in the loop is key. These changes might add a bit of complexity, but they're all part of the plan to create American jobs and strengthen the supply chain in the electric vehicle transition. If you're considering a new electric vehicle, understanding these changes will facilitate a smoother and more accessible adoption process.   New to EVs? Learn more about the benefits of driving an electric car. 

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