On April 18, the IRS pared down the list specifying which electric vehicles qualify for a $7,500 tax credit under the IRA. But this gloomy news has a bright side for enthusiasts who might be looking for their first EV.
A tax credit on buying an EV has complicated rules: The vehicle must be assembled in North America. There are battery requirements: an increasing percentage (starting at 40% in 2023) of the minerals must be extracted or processed in the US or a country with a free trade agreement with the US. An increasing percentage (starting at 50% in 2023) of battery components must be made in the US or a country with a free trade agreement.
But according to the IRS, buying an EV in order to lease it makes the vehicle a commercial one, so dealers have a much less stringent set of rules for receiving a tax credit. For commercial vehicles, there are no requirements to be made in North America; nor are there battery manufacturing requirements. Once they have received the tax credit, the dealer is motivated to offer a competitive price to the leaser, just as with any car. Ultimately, dealers are not only competing with rival makers but also with rival dealers of the same maker. Hence, the leaser reaps the savings on the lease even more than a purchase!
Why your next car should be electric
Many prospective vehicle owners still need a little bit of convincing to buy an electric car. What are their advantages?
Key to owning an EV is having a place to charge it. A single family home makes this relatively straightforward. This is especially true if there is an electric dryer in the garage, close to the EV’s parking area. There are devices that plug into the dryer outlet that “split power” between a dryer and an EV charger; the EV charging is paused while the dryer is running.
The alternatives to such a power splitter are using a weaker Level 1 charger, which uses only 120 V but can take many hours to reach a full charge, or upgrading your home’s electrical panel and service. Such an upgrade can undoubtedly be valuable in the long term, but it can be expensive and slow; PG&E has a waiting list of 4 to 8 months for such upgrades.
If you live in a multi-family home or apartment, you may already have an electric vehicle charger available for you to share with other drivers in the building. (If not, you may want to talk to your landlord or manager, since it’s a convenient amenity for attracting or retaining renters.) And of course, public chargers are available too.
Tax credit eligibility
When purchasing an EV, qualifications for receiving a tax credit on a new or used electric vehicle is based on your Modified Adjusted Gross Income (MAGI), reported on your federal tax return. Single taxpayers making $150,000 or less (or heads of household making $225,000 or less, or those filing jointly making $300,000 or less) can receive a $7,500 tax credit for new EVs (small and intermediate cars that cost up to $55,000; SUVs, trucks, and vans up to $80,000). Single taxpayers with a MAGI of $75,000 or less can receive a $4,000 tax credit for used EVs that cost up to $25,000.
The rules have been updated for receiving tax rebates when purchasing an electric vehicle. Since August 17, 2022, a rule requiring final assembly in North America has been in effect. Two new requirements concerning the vehicle’s battery and materials have been added in order to receive the full discount of $7,500, split into $3,750 each: a “critical minerals” portion and a “battery components” portion.
Critical Minerals: For $3,750 of the tax credit, 40% of the minerals contained in the vehicle’s battery must have been extracted or processed in the U.S. or in a nation that has a free trade agreement with the U.S. That percentage requirement gradually increases at 10% per year until it reaches a maximum of 80% in 2027.
Battery Components: For the other $3,750 of the tax credit, a percentage of the EV battery’s components be manufactured or assembled within North America. For 2023, 50% of the battery’s components must meet that requirement. That percentage also increases every year, until it reaches the 100% threshold in 2029.
On April 18th, the IRS unveiled its updated list for which automobile makes and models qualify for tax rebates. Some vehicles that previously were on the list, such as Tesla’s Model 3 RWD, no longer qualify for it; in the Model 3 RWD’s case, its lithium iron phosphate battery pack is produced and assembled in China, which disqualifies it.
In conclusion, the benefits of owning an electric vehicle are numerous, including environmental sustainability, lower operating costs, and improved performance. The convenience of charging an electric vehicle is becoming more accessible. Leasing an EV may also be an attractive option. Overall, owning an electric vehicle can be a smart and environmentally conscious choice for those looking for a sustainable and cost-effective transportation option.