Congress changed the rules governing electric car tax credits over the summer, but the changes didn’t immediately take effect. Some will kick in soon, while others will taper in over time. The evolving rules mean that the best time to buy an electric vehicle depends on everything from which car you want to your current income.
We’ll break it down for you.
What has changed, what will change
Before Congress passed the Inflation Reduction Act in August, federal EV tax credits were reasonably easy to understand. Buyers could claim a credit of up to $7,500 if they bought one of the first 200,000 EVs or plug-in hybrid vehicles (PHEVs) a manufacturer built.
Once a manufacturer hit that cap, the credit phased out over the remaining year.
Two manufacturers, General Motors GM, -2.02% and Tesla TSLA, -0.24%, had exceeded the cap. Buyers couldn’t qualify for a credit when buying one of their cars. Another — Toyota TM, -0.58%— crossed it during 2022, meaning buyers could still be eligible for part of the credit.
No other manufacturer had hit the cap, so all EVs and PHEVs from other manufacturers qualify today.
The act changes the rules radically. Broadly, it eliminates the manufacturer cap and introduces income and price limits instead.
That means buyers can again qualify for the credit when buying a GM, Tesla, or Toyota product. But only if they fall under income limits and the car falls under price caps.
Those rules take effect on Jan. 1, 2023.
Some vehicles that don’t qualify for a credit on Dec. 31 will be eligible on Jan. 1 — chiefly those made by GM and Tesla.
New income and price caps
Only individuals reporting adjusted gross incomes of $150,000 or less qualify for the discounts. The limit moves to $225,000 for those filing as head of household and $300,000 for joint filers.
The law also introduces price caps. The discount now applies only to cars priced under $55,000 and trucks and SUVs priced under $80,000.
That rules out many Tesla products. Only the least-expensive version of its Model 3 sedan, the Model 3 Standard Range, sneaks in under the price cap. Every Tesla Model Y SUV qualifies. No Model S or Model X makes it in under the price cap.
Factory location limits
Congress aimed the new regulations at getting more Americans into electric cars to cut greenhouse gas emissions. But it has other aims, too.
Lawmakers designed the act to boost North American manufacturing. Only EVs assembled in North America qualify for the credit. That rules out some popular models, like the Hyundai Ioniq 5, 2022 North American Car of the Year, built in South Korea. It can be challenging to determine precisely where the manufacturer built a car. Some manufacturers make the same cars in several countries and ship them around the globe. The only way to be sure is to get the vehicle identification number (VIN) of the car you want to buy and input it into the U.S. Department of Energy’s VIN decoder.
Mining location limits
The act also phases in a set of rules requiring manufacturers to mine critical battery components in the U.S. or from major trade partners. Those rules don’t kick in until 2024, so you don’t need to factor them into your buying decision today.
Automakers are working to adjust their supply chains to meet the requirements. But, according to the Alliance for Automotive Innovation (a major industry trade group), no electric car could meet the battery sourcing requirements today.
Tesla is offering a discount to shop before Jan. 1
Many Tesla shoppers have figured out that their car will qualify for a tax rebate if they wait to buy — so many that it may be causing problems for the company.
Tesla reports delivery figures quarterly. The company has had a rough quarter, with its stock price falling dramatically after CEO Elon Musk began devoting much of his time to running Twitter. There are signs it’s worried about an artificially low delivery number in its fourth quarter results because of all the customer-requested late deliveries.
That could benefit buyers.
Tesla rarely discounts its cars. But in December, it’s offering a discount of $3,750 on every Model 3 and Model Y if customers agree to take delivery in 2022.
For some buyers, waiting for the tax rebate in January is still the best move. But if you plan to buy a Tesla and your income will keep you from qualifying for the tax incentive, you could see a lower price by buying now.
Reasons to wait another year?
One last component of the law might affect your decision. Before and after Jan. 1, 2023, the rules allow you to take the $7,500 discount as a credit on your taxes.
On Jan. 1, 2024, dealers will be allowed to offer it as an upfront discount instead. Waiting another year might make sense for buyers who can’t easily afford to float the $7,500 until tax time.
Putting it all together
So, if you’re shopping for an electric vehicle, when should you buy it?
If you want a GM, Tesla, or Toyota product, you won’t be eligible for the $7,500 tax credit in 2022. You might be eligible in 2023 if your income and the car’s price both fit under the new caps. In that case, you should wait.
If you’re buying a Tesla Model 3 or Model Y, however, and either your income or the car’s price means it won’t qualify, act now and take Tesla’s discount offer.
If you want to buy an EV from another manufacturer, you might be better off acting before Jan. 1. Income and price caps won’t affect your purchase then, and many cars that qualify under the old rules won’t be eligible under the new ones because of where they build them.
SOURCE | MARKET WATCH |