Energy and EV Credits in Recent Inflation Reduction Act

The primary goal of the bill signed by President Biden this past August 16 was to provide assistance to America’s working families to help them manage the recent surge in inflation.  The Act’s objectives are to lower prescription drug costs, healthcare costs, and energy costs.

The energy cost portion of the bill aims to improve efforts to fight climate change.  This bill includes several energy related tax credits available to taxpayers as an incentive for our society to become more eco-friendly.  Electric vehicles and energy efficient home improvements continue to be the core of these available tax credits.  Some of these tax credits are new, some are revised, and some are extended.  A summary of the key energy tax credits included in the bill are listed below.

• Beginning in 2023 the tax credit for energy efficient improvements in your house (qualifying doors, windows, insulation, etc.) will increase to a $1,200 annual limit from the current $500 lifetime limit. For 2022, the $500 lifetime limit will still apply.  Beginning in 2023 the tax credit will also be increased from 10% to 30% of the qualified costs for such improvements.
• The tax credit for installing renewable energy sources such as solar, wind, and geothermal energy sources has been increased from 26% of the total installation cost of the completed project to 30% of the total installation cost. This revised and extended tax credit is effective for such projects completed in 2022 and going forward through 2032.  This tax credit drops to 26% and 22% for completed projects in years 2033 and 2034, respectively.  This credit expires December 31, 2034.
• More stringent rules to qualify for a tax credit related to the purchase of an electric vehicle (EV) are being implemented. The credit now known as “the clean vehicle credit” goes into effect beginning January 1, 2023.  Primarily due to specific limits now being applied to EV purchases, these new rules will adversely impact taxpayers that previously would have qualified for the former EV tax credit:
  • Taxpayers will not qualify to claim the tax credit if their adjusted gross income exceeds:
    • $150,000 for Single and Married Filing Separate filers
    • $300,000 for Joint filers
    • $225,000 for Head of Household filers
  • The EV’s final assembly must be in the USA (this change takes place effective August 17, 2022)
    • A link to the US Department of Energy “List of Vehicles with Final Assembly in North America” can be found at: https://afdc.energy.gov/laws/inflation-reduction-act
  • There is no longer a 200,000 cap on the number of vehicles sold to date (GM and Tesla EV purchases will again be eligible for the tax credit).
  • New price limit restrictions on qualifying EV purchases:
    • For sedans and hatchbacks the MSRP of the vehicle cannot exceed $55,000 to qualify for the tax credit.
    • For SUVs, trucks and vans the MSRP of the vehicle cannot exceed $80,000 to qualify for the tax credit.
  • New tax credit for the purchase of used EVs:
    • For used EV’s at least 2 years old or older
    • Purchased from a dealer
    • The credit equals 30% of the cost of the used EV capped at $4,000
    • Only used EV purchases less than $25,000 qualify for the tax credit
    • Taxpayers will not qualify to claim the tax credit if their adjusted gross income exceeds:
      • $75,000 for Single and Married Filing Separate filers
      • $150,000 for Joint filers
      • $112,500 for Head of Household filers
    • The “Made in America” requirement for new EV purchases does not apply to used EV purchases.
  • Beginning in 2024 individuals qualifying for the tax credit for EV purchases can transfer the tax credit to the dealer and “cash in at the point of sale” when the auto is purchased.
    • Transferring the tax credit to the dealer at the time of purchase will allow the vehicle purchaser to buy the EV at a discounted price without having to wait until the following year to claim the tax credit on their tax return, as it the case now.
  • The Alternative Fuel Refueling Property Credit extended to 2032
    • Installation cost of a home charging station for EVs
    • Tax credit is 30% of supplies and labor costs capped at $1,000

Given this new set of qualifying parameters included in the Inflation Reduction Act, and the cost of a typical EV generally only affordable by higher income earners, the question becomes – Will any taxpayers qualify to claim this revamped federal income tax credit related to their EV purchases?