The Inflation Reduction Act’s tax credit for EVs, explained

Are you in the market for a new electric car? Great! EVs are swiftly becoming the most sought-after new vehicle. They’re fun to drive and are clearly better for the environment than whatever gas-powered beater you’ve got darkening your driveway.

But shopping for a new EV is hard — expensive! limited supplies! wait lists?? — and unfortunately Congress and President Joe Biden just swooped in to make it even harder. On Tuesday, Biden signed the sweeping Inflation Reduction Act of 2022, the nation’s most significant climate bill ever passed into law. One of the major parts of the bill is new tax credits for electric vehicles.

Sounds great, right? Think again. The tax credits are actually a confusing morass of eligibility requirements and sourcing provisions that may ultimately limit what people purchase. There are income caps, sticker price requirements, battery and supply chain limitations, different phases in which the old credits will still work but new requirements apply…. woof. It’s like, do they want people to buy EVs or not?

Fortunately, you’ve got a friend in The Verge that’s here to help you navigate all these questions. Let’s dive in, shall we?

What is the Inflation Reduction Act’s EV tax credit?

Simply put, the Inflation Reduction Act includes a $7,500 tax credit at the point of sale for new EVs and $4,000 for used EVs. The new tax credits replace the old incentive system, which only included a $7,500 for new EVs.

Which car companies are eligible for the EV tax credit?

Now that President Biden signed the bill, there are a couple of new rules that immediately go into effect that you need to know about first. Most of the new rules won’t go into effect until December 31st, 2022, and will stay in place until 2032, but let’s talk about what you need to know right now.

Starting today, in order to qualify for the $7,500 tax credit, EVs must be assembled in North America. I know what you’re thinking: how the hell am I supposed to know which vehicle is made where? Fortunately, the Biden administration already has a list of 20 EVs that qualify ready to go.

Oh great, this looks useful. But I don’t see a lot of the popular EVs I was interested in buying, like the Hyundai Ioniq 5 and Kia EV6.

I got bad news, pal. Those EVs you just mentioned are made in South Korea and are no longer available for any tax credits.

What about the BMW i4? Or Toyota bZ4X?

Germany and Japan, respectively.

Damn. Okay, I guess I’ll get a Tesla. What does “manufacturer sales cap met” mean?

That means these companies — Tesla, General Motors, and Toyota (there are only three at the moment) — have already sold over 200,000 EVs, which, under the previous rules, triggers a phaseout of the $7,500 tax credit. These three companies are no longer eligible for the current tax credits.

But I thought the new tax rules were already in effect.

Not yet! We’re in a weird liminal period where some of the new rules are in effect, but most don’t kick in until the new year. I told you this was going to be confusing!

What happens to the cap?

Starting January 1st, the 200,000 vehicle cap is gone. Poof. That means Tesla, GM, and Toyota will once again be eligible for the tax credit.

What’s the best EV to buy right now?

Honestly, good luck finding anything right now. Demand for EVs is very high, and inventory is extremely low. Waitlists are long and dealers are marking up new EVs like there’s no tomorrow. It’s a perfect storm for not getting what you want.

But if you can afford it, go for one of the premium or luxury EVs, like Lucid or Rivian. Both companies are trying to get customers to sign “written binding contracts” in order to lock in the current EV tax credit before the new rules make things more complicated. After the new year, there will be a bunch more requirements about who can claim the credit and which cars are eligible.

What’s the deal with these “written binding contracts”?

So, the Inflation Reduction Act includes a “transition rule” by which any customer with a “written binding contract for purchase” of a new electric vehicle before the law goes into effect may choose to take the old tax credit, even if the vehicle is delivered after the bill’s enactment.

Before these changes were announced, customers interested in buying an EV could put down some money — usually a couple hundred bucks — for a refundable deposit on an electric vehicle. But reservations are not explicitly covered under the bill’s language, so automakers are encouraging customers to sign binding contracts in order to improve their chances of qualifying for the tax credit.

What are the income requirements for the EV tax credit? Should I buy now or wait?

If you’re rich, now is the time to buy. Right now, there are no income requirements for who can claim the credit. But starting January 1st, the credits will be capped to an income level of $150,000 for a single filing taxpayer and $300,000 for joint filers.

There will also be limits on which EVs qualify for the credit based on their manufacturer suggested retail price, or MSRP: $55,000 for new cars and $80,000 for pickup trucks, SUVs, and vans. But keep in mind, various options and high-tech features cost extra money, and the final price is what counts for the credit.

But right now and through the end of the year, these price caps don’t apply.

What if I don’t have that much money?

Then I would recommend waiting until January 2023 when a lot more slightly more affordable EVs, like the Chevy Bolt EUV and Tesla Model 3, will be newly available for the credit. (Remember, the cap is being lifted.)

This actually doesn’t seem that confusing.

Okay, now’s a good time to talk about the other major provision in the climate bill that is giving automakers headaches. Under the new rules, EVs with battery components sourced from “foreign entities of concern,” like China, where the vast majority of battery parts and minerals come from, will no longer qualify for the tax credit if they are put in service after December 31st, 2023. If the battery only contains minerals from these countries, then it will become ineligible for the credit starting December 31st, 2024.

What are the battery requirements in the new EV tax credits?

The bill would require batteries to have at least 40 percent of materials sourced from North America or a US trading partner by 2024 in order to be eligible for the tax break. By 2029, battery components would have to be 100 percent made in North America. (Weirdly, this restriction doesn’t apply to used vehicles.)

Which vehicles are eligible under these new mineral and mining rules? We — and I can’t stress this enough — don’t know.

Sounds bad.

It is, at least according to the Alliance for Automotive Innovation, which represents all the major car companies.

According to the alliance, there are currently 72 EV models available for purchase in the US, including battery, plug-in hybrid, and fuel cell electric vehicles. Of those models, 70 percent (or approximately 50 models) are ineligible for the tax credit when the bill passes. And by 2029, when the additional sourcing requirements go into effect, none would qualify for the full credit.

I thought this bill was supposed to encourage more people to buy EVs. I don’t feel very encouraged.

It still might! Experts concede that these new rules are likely to slow down EV sales in the short term, but once the auto industry brings its battery manufacturing and supply chain into North America — which it’s doing now, albeit slowly — then the real benefits of this new tax credit will really be felt.

Think about the 200,000 vehicle cap, for example. Ford was expected to hit that limit any day now, triggering the phaseout. In fact, most automakers were expected to hit the cap sooner or later. But starting January 1st, the cap is gone, and a lot more EVs that were previously ineligible for the credit are now going to qualify once again.

Automakers and government regulators are still working out the details. There’s some hope that automakers could ask for waivers from the requirements given the precedent that allowed many manufacturers to avoid “Buy America” rules that were enacted as part of last year’s bipartisan infrastructure law.

But some automakers are taking steps to bring those mining operations to the US. GM, for example, recently struck a deal to source lithium, a key ingredient in EV batteries, from geothermal deposits in California’s Salton Sea Geothermal Field.

That still leaves a lot of questions about the other key ingredients, like nickel, cobalt, and magnesium — minerals that are expected to be in short supply as the clean energy economy starts to boom.