Act Now If You Make More Than $150,000 and Want to Purchase an EV

The Inflation Reduction Act was recently signed into law and is designed to reduce the deficit and eventually inflation, by combating climate change, lowering healthcare costs, and increasing taxes on some large corporations. The law introduces changes to the Electric Vehicle (EV) tax credit and, depending on your perspective, may be seen as either good or not so good news.

Starting in 2023, the act extends the as much as $7,500 EV tax credit for ten years ending December 2032. The exact amount of the credit will be based on where a vehicle is assembled and where the parts came from. Additionally, used or pre-owned EVs (at least two years old) will now have a new tax credit of either as much as $4,000 or 30% of the price of the vehicle, whichever is less. A used EV purchased for resale won’t qualify.

The EV tax credit applies to other vehicle types as well such as hydrogen powered, plug-in hybrids with four to seven kilowatt hours of battery capacity, and some commercial vehicles if they aren’t too heavy.

Starting in 2024, you will be able to take the EV tax credit as a discount at an EV dealership for an offsetting reduction in the purchase price. This is essentially transferring the tax credit to the dealer and you get the benefit right away vs. waiting until tax time.

The Inflation Reduction Act also introduced the Alternative Fuel Refueling Property Credit through December 31, 2032. A business that installs an EV charger (and meets certain labor and construction requirements) can benefit from a tax credit of up to 30% of the total cost of equipment and installation, capped at $100,000 per property item. For at home EV charging station installations the tax credit is 30% of the costs of hardware and installation for qualified property, like EV chargers and bidirectional charging equipment.

Limitations to Qualify for the EV Tax Credit

Income Limitations: To be eligible to claim the credit (starting in 2023), your modified adjusted gross income (MAGI) cannot be over $150,000 if you file as single, $300,000 if married filing jointly, and $250,000 if filing as head of household. 

Price Limitations: For a vehicle to qualify, the manufacturer's retail suggested price (MSRP) must be no more than $55,000 for a car and for SUVs, pickup trucks, and vans the price limit is $80,000. Used EVs (at least two years old) will only qualify if they cost less than $25,000. 

Manufacturing Limitations: The Inflation Reduction Act requires, starting August 16, 2022, that final assembly of qualifying clean vehicles occurs in North America. There is also a requirement that a certain percentage (increasing by year) of the minerals and components that make up the battery of the vehicle also be sourced in North America.  A vehicle will qualify for half of the credit ($3,750) for meeting the minerals requirement and half of the credit ($3,750) for meeting the battery component requirements. A vehicle will have to meet both requirements to qualify for the full $7,500 credit. 

What Happens Now?

Scenario 1: If you entered into a written binding contract to purchase a new qualifying electric vehicle before August 16, 2022, but do not take possession of the vehicle until on or after August 16, 2022, you may claim the EV credit based on the rules that were in effect before August 16, 2022. You’re good to go.

Scenario 2: If your income is above the limitations act now to purchase and take delivery of a qualifying electric vehicle before the end of 2022. You’ll need to make sure your specific vehicle meets the new North American final assembly rules but the income limitations do not apply yet. 

Scenario 3: For those who are high earners, once 2023 starts all of the above limitations and rules go into effect. If you are interested in purchasing an EV and claiming the tax credit, tax planning will be important. Imagine being ineligible to collect $7,500 because you had $150,001 of modified adjusted gross income (MAGI). That extra dollar of income could cost you $7,500! Some of the common strategies used to lower MAGI are to make pre-tax contributions to your employer retirement plans such as a 401(k), contribute to a health savings account (HSA), and contribute to a flexible spending account (FSA) among other strategies. If you find yourself in this situation it may be beneficial to have a conversation with a financial professional who can assist you with your tax planning. Wrought Advisors offers no-cost initial consultations for which you can sign up for here.

Resources

The Department of Energy has a list of clean vehicle models that are assembled in North America.

Use the Department of Transportation VIN Decoder Tool to be sure that your specific vehicle meets the qualification requirements as a vehicle manufacturer can assemble a given model at multiple locations globally and only the specific vehicles assembled in North America will qualify.

Various states offer their own clean vehicle state tax credits and incentives. PlugStar has a helpful tool for finding the incentives available in a particular state.

Need help? Finance is complicated and we’re here to help. We offer no-cost initial consultations which you can sign up for here. 

Wrought Advisors is a fee-only financial planning firm specializing in attorneys. We help our clients reduce taxes, invest, and make smart financial decisions.

This content is developed from sources believed to be providing accurate information and is provided by Wrought Advisors LLC. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Wrought Advisors LLC is a Registered Investment Adviser with the state of New Jersey and other states jurisdictions where required.