What Is the Clean Vehicle Credit and How Does it Impact Electric-Car Buyers?

The Inflation Reduction Act of 2022 significantly modified the tax credit available for the purchase of new electric vehicles (IRC section 30D). Now known as the Clean Vehicle Credit (formerly the Plug-In Electric Drive Vehicle Credit), the credit provides incentives for taxpayers purchasing certain electric vehicles assembled in the United States.

What are the immediate changes to the Clean Vehicle Credit?

The only significant change (the new North America assembly requirement) affects qualified vehicles purchased after August 16, 2022.

Through December 31, 2022, the credit continues to be a $7,500 nonrefundable credit available for the purchase of new vehicles. This credit is comprised of $2,500 plus an amount determined by the battery’s capacity, $417 for a battery with at least five kilowatt hours (kWh) of capacity and an additional $417 for each additional kWh. Since 2010 the U.S. Department of Energy has published a list of all-electric and plug-in hybrid cars and qualifying credit amounts.

• If a taxpayer purchased and took possession of a qualifying electric vehicle before August 16, 2022, the credit is based on the original credit criteria (no North America assembly requirement).
• If a taxpayer entered a written binding contract with a dealership to purchase a qualifying electric vehicle before August 16, 2022 and did not take possession of the vehicle until August 16, 2022 or after, the credit is based on the rules prior to August 16 (no North America assembly requirement).
• If a taxpayer purchased a qualifying vehicle after August 16 and takes possession before January 1, 2023, the vehicle’s final assembly must be in North America. The U.S. Department of Energy website has published a list of vehicles that meet the North America final assembly requirements. The United States Department of Transportation has also created a VIN Decoder to verify the vehicle’s assembly location.  

What are the changes effective January 1, 2023?

There are significant changes to the credit beginning January 1, 2023. The $7,500 nonrefundable credit for new cars has two primary criteria: the source of the battery’s critical minerals, and location where the battery components are manufactured or assembled. Half of the credit, $3,750, is determined by the source of the battery’s critical material, and the other half of the credit, $3,750, is determined by the source of the battery’s components.

To be eligible in 2023:

• 40% of the applicable critical minerals must come from the U.S. or a country with a free-trade agreement with the U.S. 
• 50% of the value of applicable battery components must be manufactured or assembled in North America. 

Final vehicle assembly in North America remains a requirement. Other changes include taxpayer income restrictions, vehicle sales price limitations, and the eligibility of used vehicles (purchased after December 31, 2023). The 200,000-vehicle sales cap is eliminated in 2023, qualifying General Motors and Tesla vehicles if the other criteria is met.

Additional criteria include:

• Sales price limitations 
  • Vans, SUVs, and light trucks, $80,000 MSRP 
  • Other passenger vehicles, $55,000 MSRP 
• Modified Adjusted Gross Income limitations for individual taxpayers (lessor of current or previous year) 
  • $150,000 single 
  • $225,000 head of household 
  • $300,000 married filing joint threshold 

What are the changes after December 31, 2023?

While the critical mineral and battery component requirements gradually increase each year, additional criteria outlined above remain the same for January 1, 2024, through December 31, 2032.

• The battery’s critical minerals must come from the U.S. or a country that has a free-trade agreement with the U.S. 
  • 50% in 2024
  • 60% in 2025
  • 70% in 2026
  • 80% after 2026
• The battery’s components must be manufactured or assembled in North America. 
  • 60% in 2024 and 2025
  • 70% in 2026
  • 80% in 2027
  • 90% in 2028
  • 100% after 2028

What do the changes to the Clean Vehicle Credit mean for electric-car buyers?

In 2022 and 2023 taxpayers that purchase new, qualifying vehicles for use or lease will complete Form 8936 to claim the nonrefundable New Clean Vehicle Credit. Lessors may pass the credit on to the lessee through reduced lease payments.

The modified Clean Vehicle Credit has several provisions that will restrict eligibility because of the limited number of qualifying electric vehicles on the market. Automakers are expected to make changes to their supply chains and production methods to produce qualifying vehicles.

When considering the purchase of a new electric vehicle it is also important to consider the variety of state incentives that may be available.

Questions about how these changes impact you?

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