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Do you want to buy an electric car? This 2023 tax credit could be beneficial.

Beginning January 1, many Americans will be eligible for a $7,500 tax credit for purchasing an electric vehicle. The credit, which is part of the Inflation Reduction Act, is intended to boost EV sales while lowering greenhouse gas emissions.

However, a complicated set of requirements, including where vehicles and batteries must be manufactured in order to qualify, casts doubt on whether anyone will be able to receive the full $7,500 credit next year.

A delay in the Treasury Department’s rules for the new benefit, however, will likely make the full credit temporarily available to consumers who meet certain income and price limits for at least the first two months of 2023.

The new law also offers a smaller credit to people who purchase a used EV.

Certain EV brands may be ineligible for the new credit if they were previously eligible for a separate tax credit that began in 2010 and will expire this year. Several EV models from Kia, Hyundai, and Audi, for example, will not be eligible because they are manufactured outside of North America.

What is new in 2023?
People who purchase certain new electric vehicles, as well as some plug-in gas-electric hybrids and hydrogen fuel cell vehicles, will be eligible for a $7,500 tax credit. A $4,000 credit will be available to buyers of used battery-powered vehicles.

However, determining which vehicles and buyers will be eligible for the credits is complicated and will remain unknown until the Treasury issues proposed rules in March.

So far, it is known that new EVs must be manufactured in North America in order to qualify for the credit. Furthermore, caps on vehicle prices and buyer incomes are intended to exclude wealthier buyers.

Complex provisions will also govern battery components beginning in March. Forty percent of battery minerals must come from North America or a country with a free trade agreement with the United States, or be recycled in North America. (This threshold will eventually be raised to 80%.)

Furthermore, 50% of battery parts will have to be manufactured or assembled in North America, eventually increasing to 100%.

Battery minerals cannot be sourced from a “foreign entity of concern,” primarily China and Russia, beginning in 2025. Battery parts will be unavailable in those countries beginning in 2024, posing a challenge for the auto industry because many EV metals and parts are now sourced from China.

There are also specifications for battery size.

What types of vehicles are eligible?

That is not entirely clear due to the numerous remaining uncertainties.

General Motors and Tesla manufacture the most EVs in North America. Each also manufactures batteries in the United States. However, because of the requirements for where batteries, minerals, and parts must be manufactured, buyers of those vehicles are likely to receive only half of the tax credit, $3,750, at first. According to GM, eligible EVs will be eligible for the $3,750 credit by March, with the full credit available in 2025.

The requirements governing where minerals and parts must be sourced will be waived until Treasury issues its rules. This will enable qualified buyers to receive the full $7,500 tax credit for qualifying models as early as 2023.

According to the Energy Department, 29 EV and plug-in hybrid models were manufactured in North America for the 2022 and 2023 model years. Audi, BMW, Chevrolet, Chrysler, Ford, GMC, Jeep, Lincoln, Lucid, Nissan, Rivian, Tesla, Volvo, Cadillac, Mercedes, and Volkswagen are all represented. However, due to price restrictions or battery-size requirements, not all of these vehicle models will be eligible for credits.

What about the cost?
New electric sedans cannot cost more than $55,000 to qualify. Pickup trucks, SUVs, and vans cannot cost more than $80,000. This will rule out two more expensive Tesla models. Though Tesla’s best-selling models, the 3 and Y, will be eligible, with options, their prices may exceed the price limits.

According to Kelley Blue Book, the average EV now costs more than $65,000, though lower-priced models are on the way.

Will I be eligible for the credits?
It is determined by your income. Buyers of new EVs cannot have an adjusted gross income of more than $150,000 if single, $300,000 if filing jointly, or $225,000 if head of household.

Buyers of used EVs cannot earn more than $75,000 if they are single, $150,000 if they are filing jointly, and $112,500 if they are head of household.

How will the debt be repaid?
It will first be applied to your 2023 tax return, which you will file in 2024. Beginning in 2024, consumers will be able to transfer the credit to a dealership in order to lower the vehicle price at the time of purchase.

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