Recharged & Revamped: The Clean Vehicle Tax Credit
Senior Tax Accountant
Recharged & Revamped: The Clean Vehicle Tax Credit
Before the signing of the Inflation Reduction Act (IRA - not to be confused with Investment Retirement Account) by President Biden and currently until December 31, 2022, taxpayers who purchased certain new electric or other qualified fuel cell motor vehicles can get up to a $7,500 tax credit. The credit is calculated as the sum of $2,500 plus $417 for each kilowatt hour of capacity over 5-kilowatt hours (per electric car battery) with a cap of $5,000, for a maximum credit of $7,500. However, certain vehicles are ineligible for the credit since there is a phase-out once a manufacturer sells its 200,000th plug-in electric vehicle. For example, vehicles manufactured by Tesla or GM are currently ineligible for this tax credit. Additionally, there is no tax credit available when a taxpayer purchases a used electric vehicle.
For the remainder of 2022, since the bill has passed, the only EVs that qualify for the $7,500 credit are those manufactured and assembled in North America. However, most companies producing EVs that currently fit these assembly criteria have already met their 200,000-vehicle cap, which is still in effect for the remainder of 2022. The US Department of Energy has a list online, which can be found here: Link to List
Starting in January 2023, the Inflation Reduction Act completely changes almost all aspects of the way the credit is calculated, introduces a new set of limitations, and allows the tax credit to be potentially taken upfront without having to file a tax return first. The law also extends the credit for 10 years, until December 2032.
The tax credit for purchases of new “clean vehicles” remains at a maximum of $7,500. However, the calculation of this credit is divided into two parts of $3,750, based on how the vehicle is manufactured and ultimately assembled. To claim the full $7,500 credit, the vehicle must pass the “critical minerals requirement”, the “battery component requirement”, and the “final assembly requirement”. In short, the critical minerals requirement and battery component requirement is met when the vehicle’s battery contains at least the set percentage (50% in 2023 until ultimately 100% in 2029) of minerals and components that were either extracted or processed in the U.S. or in any country that has a free trade agreement with the U.S. The final assembly requirement is met when a manufacturer produces a new clean vehicle at a plant or factory in North America with all of the components necessary for the mechanical operation of the vehicle.
There are now limitations that affect both car manufacturers and taxpayers wishing to claim the credit. For manufacturers, the law removes the 200,000-vehicle phase-out. Therefore, qualifying vehicles from Tesla and GM are once again eligible for the credit. However, only vehicles made by qualified manufacturers are eligible for the credit; qualified manufacturers are those that have a written agreement with the IRS in which the manufacturers agree to make periodic reports to the IRS providing VINs and other vehicle information if requested. Additionally, manufacturers have a suggested retail price (MSRP) limitation. The clean vehicle credit is only available for vans, SUVs, and pickups with a maximum MSRP of $80,000; all other vehicles can have a maximum MSRP of $55,000.
For taxpayers wishing to claim the credit, there is now a Modified Adjusted Gross Income (MAGI) limitation which cannot be surpassed to be eligible. Per the IRA, no clean vehicle credit is allowed if the lesser of the MAGI of the taxpayer for the current or preceding tax year exceeds the following threshold amounts: for married filing jointly = $300,000, for heads of household = $225,000, for all other filing statuses = $150,000. As an example, if a married couple that files jointly wishes to purchase a clean energy vehicle in 2023, their expected MAGI in 2023 or their MAGI from 2022 cannot be over $300,000 to claim the credit.
Taxpayers that entered into a written binding contract to purchase a clean vehicle and place it in service on after the date the law was signed can elect to apply the old rules in claiming the credit.
Starting in 2024, taxpayers will be able to receive an advance of the clean vehicle tax credit at the time of purchase. This means that the $7,500 credit can be transferred to the dealer at the time of purchase to effectively lower the price of the vehicle by the credit amount. The dealer would then request repayment from the IRS. This can only be done with dealers that have registered with the IRS to offer this incentive.
Before the Inflation Reduction Act, no credit was allowed to be taken for the purchase of a used/previously owned clean vehicle. Now, the law provides a qualified buyer who purchases and places in service a previously owned vehicle in 2023 and income tax credit equal to the lesser of $4,000 or 30% of the vehicle’s sales price. There is once again a MAGI limitation as to who can claim this credit; no credit is allowed if the lesser of the MAGI of the taxpayer for the current or preceding tax year exceeds the following threshold amounts: for married filing jointly = $150,000, for heads of household = $112,500, for all other filing statuses = $75,000.
Note that there are specific definitions as to what qualifies as a “previously-owned vehicle”, what is considered a “qualified sale”, and who is a “qualified buyer”.
• A previously-owned clean vehicle is defined as a motor vehicle in which model year is at least two years earlier than the calendar year in which the taxpayer acquires it, is acquired in a qualified sale, and follows all of the other requirements necessary to qualify for the credit (critical minerals, battery component, and assembly).
• A qualified sale is defined as the sale of a motor vehicle by a dealer for a price of $25,000 or less to a qualified buyer other than the original buyer of the vehicle. This transaction must also be the first (and only) transfer since the IRA was enacted.
• A qualified buyer is defined as an individual who buys the vehicle for use and not resale, is not a tax dependent of another taxpayer, and has not been allowed a credit for a previously-owned clean vehicle during the three years ending on the sale date. It should be noted that children that are or can be claimed as dependents are not qualified buyers even if they have to file their own tax returns. As long as a dependency deduction potentially exists (even if not claimed) a child will always be disqualified.
Starting in 2024, taxpayers will also be able to receive an advance on the tax credit when purchasing previously-owned clean vehicles. Buyers can elect up to the time of sale to transfer the credit to the selling dealer in exchange for cash or a partial payment/down payment on the vehicle. Any payment or credit resulting from the election will not be includible on the buyer’s tax return nor deductible on the dealer’s tax return. The IRS will reimburse the dealers for all credits or cash distributed.
Please consult with your tax advisor to see whether you qualify for the credit. The IRS will likely come out with guidance over the next 6-12 months.