What you need to know about car buying after the Inflation Reduction Act
Although most of the media attention surrounding the passage of the Inflation Reduction Act on August 16 focused on the additional $80 billion in funding provided to the IRS, the Act also contained other pieces of important legislation. For example, the IRA included provisions to reduce the deficit, institute price limits on prescription medications and decrease carbon emissions.
Part of the effort to decrease emissions involved revising a previous credit for purchasing electric vehicles, renaming it the Clean Vehicle Credit. The revision included (but was not limited to) changes in the types and cost of the vehicles, location of the manufacturers, and the calculation of the credit.
With year-end discounts just around the corner, here’s what you need to know to be eligible for the credit if you’re considering purchasing an electric vehicle this year:
When will the purchase take place?
When you purchase or place the vehicle in service will determine whether you are subject to the old or new rules for qualifying for the credit.
The Clean Vehicle Credit will phase in the new rules over time. For example, the requirement that vehicles must be manufactured in North America is already in effect for electric vehicles sold after August 15, 2022. Meanwhile, other changes like the elimination of the manufacturer limitations and new battery capacity rules will be in effect for vehicles purchased after January 1, 2023.
Who was the manufacturer and how much does the vehicle cost?
Under the old rules, there was an exclusion that prevented you from claiming the credit for vehicles manufactured by Tesla or General Motors.
The new Clean Vehicle Credit will remove that limitation as of January 1, so if you’re interested in a GM or Tesla, you may want to wait to purchase. The Act does impose an MSRP limit of up to $55,000 for vehicles and $80,000 for vans, SUV’s and pickup trucks purchased after December 31, 2022. Keep that in mind if you are considering a Tesla or another higher-priced model.
What is your income?
Beginning in 2023, there’s a limit on your ability to claim the credit based on your modified adjusted gross income (MAGI). If your MAGI exceeds $300,000 for joint filers, $225,000 for heads of household, or $150,000 for all others, you aren’t eligible to claim the credit. For those whose income exceeds the limits, you would need to purchase and begin using the vehicle before year-end to qualify under the old rules.
Which is better for you, the old rules or the new?
The maximum credit is still $7,500 under either the old rules or the new post-Inflation Reduction Act rules, but the way to calculate them is different.
Be sure to discuss the specifics of the credit and your vehicle purchase with your tax advisor to determine your eligibility under either the old or new rules and what you can do to maximize your available credit! If you don’t have a tax advisor yet, Padgett’s nationwide network of EAs and CPAs are here to help, so find a location near you today.