The term “Buy American” has taken on a whole new meaning in the current electric vehicle market, and that meaning is wrapped in dollar signs. To qualify for a $7,500 tax credit when buying a new EV, you need to make sure the vehicle was assembled in North America — which means in the United States, Canada or Mexico.
The North America rule was implemented when President Joe Biden signed the Inflation Reduction Act in August, according to the U.S. Department of the Treasury. Starting Jan. 1, 2023, consumers might be eligible for the tax credit for used or previously owned cars in addition to new EVs, and businesses might be eligible for a new commercial clean vehicle credit.
As Car and Driver reported last week, the new rules greatly reduced the number of vehicles that qualify for the $7,500 tax credit. Prior to the Inflation Reduction Act, about 30 new EVs and 42 plug-in hybrids were eligible for federal income-tax credits. Those numbers fell to eight and 10, respectively, when Biden signed the bill into law — though the number of qualifying EVs will rise to 11 beginning in 2023.
The credit for used vehicles is worth up to $4,000, and some buyers might also be eligible for incentives from state and local governments (or utilities) because of rules already in place.
EV Battery Rules in Place as Well
In terms of new EVs, the updated credit rules aren’t limited to only the North America assembly requirement. Half of the $7,500 credit is contingent on at least 40% of the critical battery materials being extracted or processed in the U.S. or in countries that have a free-trade agreement with the U.S. That percentage will eventually rise to 80% in 2027. The other $3,750 is based on a requirement that a minimum of half of the value of the battery components be manufactured or assembled in North America. This will rise to 100% in 2029.
Starting in 2024, if any battery components are manufactured in “a foreign entity of concern” such as China, Iran, North Korea or Russia, then the vehicle is disqualified from the credit. That rule also will apply to the sourcing of critical materials in 2025.
Meanwhile, another change for 2023 is that the previous limit of 200,000 units of qualifying EVs per automaker will be lifted, meaning General Motors and Tesla vehicles will be eligible for the credit again. However, there will also be new price caps on qualifying EVs of $55,000 for cars and $80,000 for trucks and SUVs. This will eliminate credits on models such as the GMC Hummer and several different Teslas, including Models S and X and higher-trim Model 3s.
On the plus side, the amount of the tax credit does not depend on battery size. As Car and Driver noted, if your EV or plug-in hybrid has a battery capacity of at least 7.0 kilowatt-hours, you can get the full $7,500 credit. Used vehicles are eligible when purchased from a dealer, with a $4,000 maximum. To qualify for the credit, used EVs and plug-in hybrids must cost no more than $25,000 and be at least two model years old.
Beginning in 2024, you will get the credit for new vehicles when you make the purchase rather than having to wait until tax season, meaning the $7,500 can serve as a down payment.
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