Tax credit confusion could create an EV rush in early 2023

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As the new year begins, several popular electric vehicles, specifically some Tesla and General Motors models, may qualify for $7,500 in tax credits that they weren’t eligible for in 2022. But that eligibility may only last a few months.

It is because limitations on new tax credits enacted in August as part of the Inflation Reduction Act will not go into effect all at once, the Treasury Department announced this week. This means that the rules will temporarily be more generous, allowing greater tax credits for more electric vehicles in the first few months of the new year.

The US Treasury Department, which is implementing the rules, recently announced that rules for some of the new restrictions on tax credits — including on where the vehicle’s battery is mounted and where the minerals used in it came from — have been postponed until at least March 2023, when it announces proposed rules around that part of the requirements. According to the wording of the legislation, however, just the publication of the “proposed guidance” on these rules, which the Treasury said would happen in March, would already trigger the reductions in tax credits. But some of the new rules are taking effect as originally planned in January. This leaves a window of approximately three months in which some vehicles may be eligible for much higher tax credits than they will be eligible for later.

General Motors, for example, it has already said that once full restrictions are in place – whenever that happens – its electric vehicles will only be eligible for a $3,750 tax deduction. It is expected to take two to three years before GM vehicles can once again qualify for the full $7,500 tax credit, the company said.

While this may create a buying opportunity in the early months of the year, the downside is that it only adds to the confusion surrounding what is already a bewildering set of rules – even by tax regulation standards.

“I was hoping for more clarity, not less,” said Chris Harto, a senior policy analyst at Consumer Reports. “It seems like things seem to get more confusing every time they say something.”

Essentially, the tax rules are designed to encourage automakers to manufacture their electric vehicles and all parts of those vehicles, as much as possible, in the United States or in countries with which the United States has trade agreements. They are also designed so that the tax credits don’t go to wealthy Americans who buy expensive luxury vehicles. The latest announcement, which will temporarily open up more money for tax credits, is likely to mostly a good thing for consumers.

The uneven tax credit at the beginning of the year is just one of several potential sources of confusion.

Under the new EV tax credit rules, the Chevrolet Bolt EV and EUV are eligible for tax credits in the new year. They were not previously eligible because even though they were built in North America – one of the requirements under the new rules – General Motors, Chevrolet’s parent company, and Tesla have long sold more than 200,000 plug-in vehicles. That was the limit for any manufacturer under the exit tax credit requirements. New rules, enacted as part of the Inflation Reduction Act, remove that limit, however.

Still, not every buyer and not every electric vehicle will be eligible for credits. For example, in addition to the requirement that the vehicle be manufactured in North America, there will also be price restrictions. If it’s an SUV, its sticker price shouldn’t be more than $80,000, and if it’s a car, it shouldn’t be more than $55,000.

As a result, most Tesla models, including the Model X SUV and Model S sedan and even the Model 3, currently priced on Tesla’s website, will still not be eligible for tax credits. And the Mercedes EQS SUV, which is assembled in the United States and is currently eligible for tax credits, according to an IRS website, will become ineligible in the new year.

“It shuffles the deck to see who is eligible, and then the deck will be shuffled again when that guidance comes out. [in March]”, said Harto. “And that creates a giant mess for consumers, automakers and dealerships.”

In addition, turning is not allowed. The person purchasing the vehicle has to be the end user. If you are purchasing the vehicle only to immediately resell it to someone else, you will not be able to claim the credit.

There are also limits on the buyer’s income. Buyer cannot have a “Modified Adjusted Gross Income” over $150,000 for an individual, $300,000 for a joint couple application, or $225,000 for a single head of household. These restrictions will prevent many buyers of luxury electric vehicles from getting tax credits.

The best thing vehicle buyers can do is ask whether the specific vehicle they’re buying qualifies for a tax credit, said Andrew Koblenz, vice president of legal and regulatory affairs for the National Automobile Dealers Association. Some vehicle models are manufactured at more than one plant, so two identical-looking electric SUVs on the same dealership lot may not qualify or qualify for the same credit amount.

“It’s a great time to shop. It’s great that there are more eligible vehicles now, but you still need to make sure the one you’re interested in is eligible,” said Koblenz. “You need to ask your dealer and the manufacturer that question and make sure you qualify too.”



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