The Inflation Reduction Act is shaping up to be one of the most important pieces of legislation for the electric vehicle (EV) industry. Originally signed into law on Aug. 16, 2022, it focuses primarily on driving down inflation. Prices for consumer stables increased by 9.1% year over year at the end of June 2022, marking the largest jump in inflation in 40 years. While the Inflation Reduction Act seeks to drive down inflation, it also encourages consumers to switch from gas-powered vehicles to EVs.
$7,500 Tax Credit
Under the Inflation Reduction Act, consumers can take advantage of a $7,500 tax credit when buying a new EV. The high cost of EVs, of course, has discouraged many consumers from making the switch. EVs typically cost more than gas-powered vehicles. With a $7,500 tax credit, though, consumers can save a substantial amount of money when buying a new EV.
What About the Existing Tax Credit?
There’s currently a similar tax credit available to consumers who purchase an EV. And like the Inflation Reduction Act’s tax credit, it offers consumers up to $7,500 towards the purchase of a new EV. However, the Inflation Reduction Act features some provisions that distinguish it from the existing EV-related tax credit.
For starters, the Inflation Reduction Act makes the tax credit available at the time of purchase. Previously, consumers were forced to pay in full when buying a new EV, after which they could claim the $7,500 deduction when filing their taxes. Consumers no longer have to pay in full to take advantage of the tax credit. If you’re looking to buy a new $40,000 EV at the dealership, you’ll only have to pay $32,500 for it. The tax credit will be “baked into” the price.
The Inflation Reduction Act also introduces a separate tax credit for used EVs. The $7,500 tax credit is only good for the purchase of a new EV. Fortunately, the Inflation Reduction Act now offers consumers a $4,000 tax credit towards the purchase of a used EV.
It’s important to note that the Inflation Reduction Act has caveats. It places a cap of $55,000 on EV sedans and $80,000 on SUVs, trucks and vans. If a particular EV costs more than the respective cap, consumers won’t receive a tax credit for it. The Inflation Reduction Act also restricts the tax credit to consumers with an annual income of $150,000 or less when filing single or $300,000 or less when filing jointly.