In a year like 2022, there has been a lot of talk from D.C. around its Covid-19 response and how to tame inflation. But investors have also heard discussions on everything from the solar industry to tax credits for electric cars. Specifically, these talking points have come up in light of the Inflation Reduction Act.
Initially, Democrats were seeking a $3.5 trillion plan to address a bevy of issues. Eventually, lawmakers agreed on a smaller deal. The new plan includes $370 billion for climate change efforts.
According to Axios, “Independent analyses show the bill, combined with other ongoing emissions reductions, would cut as much as 40% of U.S. greenhouse gas emissions by 2030.” Aside from solar and wind power, incentives for electric vehicles (EVs) are also baked into the bill.
This package could be voted on by the House as soon as Friday and signed into law by next week. That will have consumers looking at ways to snag a tax credit for electric cars. But how exactly can they do so?
How to Get a Tax Credit for Electric Cars Under the Inflation Reduction Act
Currently, buyers can receive a federal tax credit of up to $7,500 when they purchase an EV. However, that credit is capped at 200,000 sold vehicles per manufacturer. As you may have guessed, companies like Tesla (NASDAQ:TSLA) and General Motors (NYSE:GM) have already hit those caps.
However, those caps will be eliminated by 2023 — that is, assuming the vehicles remain under a certain price. Specifically, electric trucks and SUVs will have to be under $80,000 while other EVs will have to be under $55,000. Furthermore, buyers of used EVs will be able to receive a $4,000 tax credit.
These buyers have requirements, too. To be eligible, buyers who file their taxes separately will have to make less than $150,000. Married filers will have to make less than $300,000.
To satisfy certain lawmakers, the credits also have certain requirements about the components and assembly locations of eligible vehicles. Specifically, “EVs must be assembled in North America to be eligible for the credits.” This will “take effect immediately after the president signs the bill into law.”
Finally, “only cars with batteries containing a certain percentage of materials sourced from North America or U.S. trading partners will qualify for the credits moving forward.” That requirement will be phased in over time, however.
Is It Time to Buy an EV?
There are pros and cons when it comes to trying to get a tax credit for electric cars. Buying an EV now gives consumers a chance to cash in on the new federal tax credits, provided their cars meet the requirements. The con? Not many cars do — or will — meet the requirements.
Right off the bat, only about 25 EVs for sale initially meet the requirements, including being assembled in North America. Once 2023 rolls around and other sourcing requirements come into play, though, no current EVs will qualify for the full credit.
That’s not until automakers can rearrange their supply chains, favoring more North American input. Given the state of the manufacturing market and supply chains in general, though, that won’t be a rapid transition. As such, consumers looking to buy an EV may want to do so sooner rather than later.
On the date of publication, Bret Kenwell did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
