The Inflation Reduction Act of 2022 includes updated tax credits for electric vehicle (EV) purchases and energy-efficient home improvements such as heat pumps and solar panels that may have your clients taking notice.
However, the provisions can be somewhat confusing.
The act includes a major overhaul to qualifications for the EV tax credit. The changes mean some vehicles previously eligible for tax credits will no longer qualify, while formerly ineligible vehicles will now qualify. The credit applies to “clean vehicles,” meaning it covers hydrogen fuel cell vehicles as well as full-electric vehicles and plug-in hybrids.
Here are a few points that might help clients take advantage of tax credits offered by the Inflation Reduction Act.
1. EVs must be manufactured in North America to qualify for the tax credit.
As of August 17, 2022, electric vehicles must be assembled in North America to qualify for a tax credit up to $7,500. This change means some popular Asian and European-based nameplates will no longer qualify. However, overseas manufacturers with North American assembly plants will still be eligible. The IRS will rely on a vehicle’s vehicle identification number (VIN) to determine its country of origin. Buyers should check manufacturing details to see which EV models qualify.
2. Vehicle price and income limits apply.
EVs continue to be subject to price limits to qualify for the tax credit. The MSRP for electric vans, sport utility vehicles, and pickup trucks must be below $80,000. MSRP for other vehicles must be below $55,000.
In addition to the EV price caps, buyers must also meet income requirements. To qualify for the tax credit, a buyer’s modified adjusted gross income (MAGI) must be less than $300,000 for joint filers, $225,000 for head of household filers, and $150,000 for single filers.
3. EV sales caps will be eliminated in 2023.
Beginning in 2023, EV manufacturers are no longer subject to a sales cap. Previously, tax credits began to fade after a manufacturer produced more than 200,000 EVs. Elimination of the sales cap means vehicles manufactured by Tesla, GM, and Toyota may once again be eligible for tax credits if they meet other qualifying criteria.
4. Some pre-owned EVs will now qualify for tax credits.
Previously, EV tax credits applied only to new cars. Now, buyers of some pre-owned vehicles can qualify for as much as $4,000 in credits. There are certain restrictions: The pre-owned EV must cost under $25,000, be at least two model years old, and be purchased at a dealership. The credit can only be taken once for each car. Buyers also need to meet income requirements: under $75,000 for individual filers, $112,500 for heads of households, and $150,000 for joint return filers.
5. Starting in 2024, the tax credit is applied up-front.
Currently, EV buyers must wait until they file their federal income taxes to claim their credit. However, starting in 2024, the credits will be applied at the time of purchase, effectively lowering the vehicle's price by up to $7,500 and lowering the amount to finance.
6. Energy-efficient home improvements are also eligible for credits.
The act also provides incentives for homeowners to make energy-efficient improvements to their homes, including an uncapped 30% tax credit for home solar energy systems. The credit can apply both to systems that are purchased with cash and those that are financed. Geothermal heating systems, heat pumps, and energy-efficient doors and windows are also eligible for tax credits, with limitations varying by item.
7. EV manufacturers are planning increased North America production.
Several European and Asian auto manufacturers whose vehicles will no longer qualify for tax credits are making plans to expand production with new facilities in the United States.
With a goal of reducing greenhouse gases by 40% below 2005 levels by 2030 — and government investment behind it — the Inflation Reduction Act is likely to impact several industries and sectors.
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Putnam Retail Management.