Electric vehicles are becoming mainstream in a big way. Last year they accounted for an impressive 7.1% of all new car purchases. Look for those numbers to take another leap forward in the future as tax breaks of $7,500 kick in for some electric cars and trucks.
It’s part of the Inflation Reduction Act, a landmark law passed in August 2022 that provides financial incentives for Americans to buy electricity when it comes to cars and appliances as the nation moves away from fossil fuels. There are also incentives for upgrading appliances and greening your home.
LEARN MORE: Going green used to be a luxury. Now it can save you thousands. Here’s how.
This could go a long way in helping the United States transition to carbon-free energy. Transportation was the largest source of greenhouse gas emissions in the United States in 2022, according to the Sustainable Energy in America 2023 Factbook.
Although the Act itself was passed eight months ago, many of the details are still being ironed out, so figuring out whether you or the car you want qualifies isn’t easy and there’s a lot up in the air. You will need to check your personal eligibility and car eligibility carefully, and the latter can change quickly.
The tax credit could be more difficult to access soon, when the battery supply requirements come into play, possibly restricting which cars qualify. But things should get easier in 2024 when you can transfer the tax credit to your dealer so you get an upfront discount.
Here’s what you need to know, for now, about tax credits for electric vehicles:
Conclusion: When Should You Buy an EV?
- Almost ready to buy? Do it soon, like now. The number of eligible vehicles may decrease in 2023, for complex reasons that you will learn about below. If you’re close to shopping, move fast for the most options and the best chance to save.
- Still researching? Take your time: 2024 could be a better time to buy. The rules will be finalized in the coming months and dealers could offer you discounts in advance next year. In general, getting these discounts should be a smoother experience if you can wait.
Who can benefit from tax credits for electric vehicles? Which vehicles qualify?
The law offers qualifying vehicle buyers tax credits of up to $7,500 for the purchase of a new electric vehicle (EV) or plug-in hybrid and up to $4,000 for a used one. However, there are income limits and price limits.
Income Eligibility Limits:
- Households filing jointly earn $300,000 or less.
- Heads of household earning $225,000 or less.
- Single taxpayers earning $150,000 or less
Vehicle requirements:
WHAT IS GREEN ENERGY?:What you need to know about renewable and clean energy like solar and wind energy
NET ENERGY RECORD:More than 40% of US electricity now comes from carbon-free sources
What’s the catch?
The money is only available as non-refundable tax credits. This means you can’t get more money back from the tax credit than you actually owe in tax.
Let’s say you buy a Chevy Bolt for $27,000. If your household pays the federal government at least $7,500 in taxes and otherwise qualifies for the credit, your tax bill will be reduced by that much.
If you owe only $3,000 in taxes, you can only get a $3,000 credit, even if you’re eligible for the full $7,500, said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting.
On average, Americans with adjusted gross incomes between $50,000 and $75,000 paid $4,567 in taxes in 2020, according to the IRS. Those who earned between $75,000 and $100,000 paid $7,363.
That means middle- and higher-income families are more likely to take advantage of the tax credits because of how the law was written, said Sage Briscoe, senior federal policy director for implementation at Rewiring America, an organization non-profit electrification.
“Non-refundable tax credits favor those with larger tax bills and tend to be higher income earners,” he said.
A new battery rule may change things
The IRA contains language requiring critical minerals and battery components used in an electric vehicle to be sourced or recycled in North America, but it has not been fully spelled out. The requirements also become stricter over time because Congress wanted to encourage automakers to move electric vehicle battery production to the United States.
How does climate change affect you?: Subscribe to Climate Point’s weekly newsletter
READ MORE: Breaking climate change news from USA TODAY
Soon, perhaps in late March, the IRS will release new regulations detailing how it will work. These are some of the more complex parts of the IRA clean car credit.
Once the regulations go into effect, “many vehicles currently eligible for the full $7,500 credit will likely only be eligible for half the credit,” said Chris Harto, senior energy policy analyst at Consumer Report.
To avoid this, you should buy and receive an electric vehicle before the rules come out.
“If they say you’re going to get it in May, you might be stuck,” Briscoe said.
Tax credits for electric vehicles will change again in 2024
Starting in 2024, buyers can also transfer the EV tax credit to the dealer, so they get the $7,500 upfront rebate.
How exactly this will play out is still unknown.
“It’s unclear how the dealer will know you’re eligible for full credit,” Luscombe said. “Maybe that’s why it’s delayed a year so the IRS can figure it out.”
Some EV manufacturers whose vehicles don’t qualify because they’re too expensive may also offer to match the tax credit, so definitely check their websites.
Get up to $1,000 off by installing an electric vehicle charger
Once you own an EV, you may want an EV charger at home. The IRA rolls over a tax credit that covers 30% of the installation cost, up to $1,000.
As written, the law includes geographic restrictions on where the credit can be used to encourage the installation of public chargers in rural and low-income areas.
Check the Rewiring America website to see if you qualify.
Use these calculators to see if you qualify
The Inflation Reduction Act’s tax credits around electric vehicles are so complex that consumers should be cautious, said Keith Barry, auto writer for Consumer Reports.
“You should always check your dealer’s math,” he said. “It doesn’t mean they are doing anything malicious – buying a car is a very complex process. Car salesmen are not accountants.”
Consumer Reports, a resource for car shoppers, has a tool for understanding electric vehicle incentives and tax credits.
Rewiring America also offers a comprehensive web calculator for all IRA tax credits and deductions.
