By Andrew Keshner
Your new electric car may land you a $7,500 tax credit now that the Inflation Reduction Act — designed to fight climate change and inflation — has been signed into law by President Biden.
But the new law carries certain conditions. The big change for new vehicles purchased after Aug. 16, 2022: Final assembly must take place in North America.
The electric-vehicle tax credit is one of an array of clean energy tax incentives geared at consumers and businesses within the law. Other portions of the bill include rebates and tax credits for energy efficient household systems, including solar panels, heat pumps and electric water heaters.
The Inflation Reduction Act allows for tax credits of up to $4,000 for pre-owned electric vehicles . But they don’t kick in until next year and it will be two years before car buyers can apply the credit immediately at the point of sale, Treasury Department guidance says.
The department adds : “Consumers that purchase a qualifying electric vehicle can continue to claim the electric vehicle tax credit on their annual tax filing. Starting in 2024, the Inflation Reduction Act establishes a mechanism that will allow car buyers to transfer the credit to dealers at the point of sale so that it can directly reduce the purchase price.”
More importantly, the U.S. auto industry still has to catch up with the manufacturing requirements so more cars can even qualify for the credit, according to at least one trade group.
The average transaction price for a new electric vehicle in July was $66,645, according to Kelley Blue Book. To put that in context: The average price for all new vehicles last month was a record-setting $48,182, the Cox Automotive brand said.
Here’s what to know now about putting the tax credit to use:
Income caps, sticker price limits
The electric vehicle tax credit pays up to $7,500 on new electric cars, but has been a part of the federal tax code for years.
Here’s what’s changed: The Inflation Reduction Act added new requirements about who is eligible for the tax savings. Eligible individuals can make $150,000 annually or less, while married couples filing jointly can make up to $300,000 a year.
The new caps kick in on purchases beginning January 1, 2023, according to a Treasury Department official. The caps on prices ($55,000 for cars and $80,000 for vans, trucks and SUVs) also begin to apply at that same time, the official noted.
Earn above the income limits and the tax credit eligibility vanishes, said Alan Wink, managing director, capital markets, at EisnerAmper, a tax accounting and advisory firm.
The caps apply to taxable income, not gross income, Wink noted. That’s the gross income — like all the wage income, interest income and any capital gains — minus eligible deductions. Given the income ceilings “you have to know what your personal tax situation is,” Wink said.
Another new feature is the credit’s restriction to electric cars, wagons and hatchbacks with a manufacturer suggested retail price of $55,000 and $80,000 for pickup trucks, vans and SUVs. Like the income limits, the tax credit abruptly end for vehicles above the sticker price limits, Wink said. “You have to be conscious of the price you’re buying the vehicle for. It’s all of nothing.”
Though the credit used to phase out after 200,000 qualifying vehicles were sold, the new law ultimately lifts away that limit on Jan. 1, 2023. Therefore, Teslas’ /zigman2/quotes/203558040/composite TSLA -1.10% Model 3 and Y will once again be eligible.
Electrek, an online news site for electric vehicles and sustainable energy, gives a list of electric vehicles made by Ford /zigman2/quotes/208911460/composite F -2.35% , Audi , Mercedes /zigman2/quotes/201850364/delayed XE:MBG -0.15% , General Motors /zigman2/quotes/205226835/composite GM -3.52% , among others, that are assembled in North America that are eligible for the tax credit.
Keep in mind these are the rules and incentives attached to federal income taxes. Many state have their own tax incentives and rebates to consider. Here’s a state-by-state breakdown from the Department of Energy.
Final assembly in North America
Now that the legislation is enacted, the Treasury Department said “the tax credit is only available for qualifying electric vehicles for which final assembly occurred in North America.”
To figure out the vehicle’s origins – and tax credit applicability – the Department of Energy has a list of 2022 and 2023 models that may meet the requirement, and the list will be updated. Here’s the link .
It includes the 2022 Ford /zigman2/quotes/208911460/composite F -2.35% Escape PHEV, with an MSRP starting at $35,455 , and the Nissan Leaf with an MSRP beginning at $27,400 . Tesla /zigman2/quotes/203558040/composite TSLA -1.10% models and Chevy /zigman2/quotes/205226835/composite GM -3.52% Bolts already have met manufacturer sales caps, the list says.
“Because some models are built in multiple locations, there may be vehicles on this list that do not meet the final assembly requirement in all circumstances,” the Treasury Department guidance notes.
Would-be buyers can check where a particular car was made by plugging in its Vehicle Identification Number (VIN) at a National Highway Traffic Safety Administration website .
When people enter the number, they should look to the “plant information” field, which, the Treasury Department says, “expressly lists the build plant and country for the searched vehicle.”
Final assembly location is also on the window sticker, according to Cars.com.
Currently,, 70% of electric vehicles currently available for purchase wouldn’t be able to access the credit, John Bozzella, president and CEO of the Alliance of Automotive Innovation, said earlier this month. It could drop even lower when extra North America sourcing requirements kick in on battery ingredients, said Bozzella, who leads a trade group with major carmakers as members.
By 2024, half of the battery’s component value has to come from North America for tax credit eligibility, Wink said. It dials up to 100% after 2028, the law shows.
“On the demand front, we’ve said the legislation’s purchase incentive was a missed opportunity, especially while raw material and battery supply chains are still coming into place,” Bozzella said in a Tuesday statement after Biden signed the bill. “But Congress also made some meaningful investments on the supply side.”
For now, the tax credit can apply for new electric vehicles without the North America final assembly — so long as a buyer “entered into a written binding contract” for a new qualifying electric vehicle before Aug. 16, but didn’t get the vehicle yet.
For anyone buying an electric vehicle between now and Jan. 1, 2023, the IRS explained that apart from the final assembly rule kicking into place, the EV credit rules applying before, “including those involving the manufacturing caps on vehicles sold” still apply.
More details to come
More specific information is coming, according to the Treasury Department and the IRS. That includes the details on the tax credits that can be applied to pre-owned vehicles. The credit is either up to $4,000 or 30% of the sales price, whichever being the lesser sum. A qualifying car needs to be a model year that’s at least two years old before the year when the car is purchased, notes the Alliance of Automotive Innovation.
The credit gets established in January 2023 , according to the Treasury Department. Here, the sale is capped at $25,000 and individual filers need to make under $75,000 while married couples filing jointly need to make under $150,000.
Another thing coming is the dealer’s capacity to apply the credit’s value during the sale in order to decrease the purchase price. That starts in 2024, the Treasury Department said. For now, people can keep claiming the credit on their income tax filing to tap its benefits.