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The Inflation Reduction Act isn’t just about cutting the cost of prescription drugs. The new law, signed Aug. 16, also offers tax credits of up to $7,500 for those who buy an electric vehicle (EV) in the next 10 years, starting in 2023.
The good news doesn’t end with new cars. The law also allows a credit for used EVs purchased from dealers, starting in 2024. The credit is equal to the lesser of 30 percent of the sale price or $4,000. The sale price can’t be more than $25,000, and the EV must be at least two years old.
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Unlike tax deductions, which reduce your taxable income, tax credits reduce your bill dollar for dollar. If you owe $8,000 in taxes and get a $7,500 tax credit, your tax bill shrinks to $500. However, the EVs will only reduce your tax bill to zero; if you owe $6,000 and get a $7,500 credit, you won’t get a check from the Internal Revenue Service for the $1,500 difference. And you can’t carry unused credits forward into the next tax year.
Plenty of strings attached
The EV tax credits are aimed at lower-cost EVs. The credit can only be claimed on trucks, vans and SUVs that cost $80,000 or less, and other vehicles including sedans that cost $55,000 or less.
High-income buyers are excluded, too. To qualify for the new-EV tax credit, a single filer must have income below $150,000. Married couples filing jointly must have income of less than $300,000. For the used-EV tax credit, the income limits are lower: $75,000 for single filers and $150,000 for couples.
The tax credit is actually two tax credits, each worth $3,750. The first credit is for EVs that are assembled in North America — the U.S., Mexico and Canada. The other credit is for EVs whose batteries contain materials sourced in North America. If you’d like to find out where your car was assembled, it’s in your car’s vehicle identification number (VIN). A VIN beginning with a 1, 4 or 5 indicates that the vehicle was assembled in the United States; a VIN beginning with a 2 indicates it was assembled in Canada; a VIN beginning with a 3 indicates the vehicle was made in Mexico.