President Joe Biden recently signed the Inflation Reduction Act (IRA), setting quite a few changes into motion for consumers looking to purchase an electric vehicle or a plug-in hybrid vehicle. While there are plenty of upsides to the IRA, there are some major short-term drawbacks that buyers should be aware of.
The first hurdle consumers are facing when purchasing an electrified vehicle is the new cap on EVs. Under the IRA, the new tax credit will not be available on electrified cars that cost above $55,000 and SUVs, vans, and pickups that cost more than $80,000. Unfortunately, that cap rules out quite a few vehicles. The majority of automakers decided to introduce pricey, luxurious electric vehicles before affordable options and now they find their vehicles priced out of the federal tax credit.
The IRA also sets a cap on how much income consumers can have to claim the federal tax credit. For consumers that file their taxes as a single, the maximum adjusted gross income is $150,000. The figure climbs to $225,000 for heads of households and $300,000 for joint filers.
Automakers have found a way around the IRA’s strict requirements on both price caps, which involves having consumers sign binding agreements to purchase a vehicle. When a consumer signs a binding agreement, the vehicle then becomes eligible for the previous federal tax credit of $7,500. Fisker, Rivian, and Lucid are a few brands that attempted to take advantage of this loophole to ensure consumers could take advantage of the federal tax credit before things changed.
On top of the price caps, the IRA also requires vehicles to have a final assembly point in North America. The bill also restricts the full tax credit to new EVs with battery components that are sourced from North America and battery minerals that come from countries that have a free trade agreement with the U.S. or are recycled in North America. The restriction on minerals and components is expected to begin in 2024.
As Green Car Reports points out, these restrictions will limit the number of electric vehicles that will qualify for the $7,500 federal tax credit. The vehicles that are expected to be eligible for the credit include the Chevrolet Bolt EV, Ford Mustang Mach-E, Ford E-Transit, Ford F-150 Lightning, Nissan Leaf, Volkswagen ID.4, Tesla Model 3, and Tesla Model Y. Remember that the IRA will lift the 200,000-vehicle cap that currently affects Tesla and Chevrolet’s vehicles. The list of eligible PHEVs include the Chrysler Pacifica Hybrid, Ford Escape Plug-in Hybrid, Jeep Wrangler 4xe, Jeep Grand Cherokee 4xe, Lincoln Aviator Grand Touring, and Lincoln Corsair Grand Touring.
Under the new bill, wealthy consumers looking to purchase a premium EV will find that the federal tax credit has dried up. On the flip side, the IRA is aimed at helping shoppers looking for a relatively affordable EV that’s built in North America. That’s a much smaller population than before, but the bill looks to ensure that the federal tax credit for EVs goes to consumers that need it and isn’t used up by wealthy shoppers. It’s going to take years for automakers to shift their final assembly location to the U.S. and modify their supply chains to get battery minerals and components that meet the requirements. So, consumers will only have a small pool of EVs to choose from in the near future if they're looking to take advantage of the $7,500 federal tax credit.
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