If you are contemplating purchasing a plug-in electric or fuel cell vehicle, now is the time!…..if you can qualify for one of the tax credits. To qualify for the New Clean Vehicle Purchased in 2023 or After Tax Credit, which is part of the 2022 Inflation Reduction Act (IRA), your adjusted gross income (AGI) must be less than $300,000 for married couples filing jointly or $150,000 for individuals. This income cap excludes a lot of the taxpayers who can afford to purchase a new electric vehicle from taking this credit. However, following theability-to-pay taxation principle, this cap is fair because taxpayers exceeding that cap have more income and therefore do not need a tax credit to offset their tax liability. Further, these high income individuals do not need a tax credit to incentivize their purchase of an electric car since the purchase of a qualifying electric car is not cost prohibitive for them. However, in excluding these high income taxpayers from the tax credit, there is a missed opportunity to incentivize those high income taxpayers who otherwise would not have purchased a qualifying electric vehicle to do so to get the financial benefit of this tax credit.
Additionally, the vehicle’s retail price cannot exceed $80,000 for SUVs and $55,000 for other cars. Thus, if you were in the market for a luxury electric car or the new Tesla Model Y 5-seater (classified in other), this tax credit does not apply to you. Notably, vehicles must be assembled in North America to be eligible for the credit. For qualifying taxpayers, the credit is anywhere from $3,751 to a maximum of $7,500depending on battery capacity.
For the first time, there is also a tax credit for used clean vehicles. The credit is the lesser of 30% of the vehicle’s sale price or $4,000. The AGI caps for this credit are $150,000 for married filing jointly and $75,000 for individuals. The sale price of the vehicle must be under $25,000 and the car’s model year must be at least 2 years old. Other qualification requirements include not being the original owner of the vehicle, the owner buying it for use not resale, not being claimed as a dependent on another’s tax return, the vehicle being purchased from a dealer in the US, and not having claimed another used vehicle credit in the 3 years before the purchase date. Most of these qualification requirements prevent abuse of this tax credit and preserve its intended goal: incentivizing the purchase of environmentally friendly vehicles.
For taxpayers who lease their vehicles without intrinsic motivation to drive a clean vehicle, there is no tax incentive for them to start leasing clean vehicles. Lessees’ exclusion from this tax credit is another way the tax system favors those who buy (mostly higher income taxpayers).
However, another group excluded from this tax credit are children under 19 and full-time students under the age of 24 buying a used electric vehicle who are claimed by their parent as a dependent. This dependent exclusion from the used clean vehicle tax credit is problematic as adults ages 18-29 are more likely than older adults to consider buying an electric vehicle. These young adults are not excluded from the new clean vehicle credit, but often, many of these taxpayers have not accumulated enough wealth to purchase a new clean vehicle and can only afford a used clean vehicle but are excluded from the used clean vehicle tax credit.
For both new and used clean vehicle tax credits, there are a variety of battery, manufacturer, and weight requirements. However, the battery requirements for new clean vehicles are anticipated to become stricter when the IRS releases more guidance in March. Thus, now is the time to buy as the group of taxpayers who qualify for these credits is about to become even more narrow.
One inequity of these credits is that taxpayers who are leasing an electric car are excluded from these credits. The lessor gets the tax credit if they qualify and can lower the lessee’s payments but there is no requirement for lessors to pass those savings on to the lessees. Taxpayers leasing electric cars might have the same passion for helping the environment as a clean vehicle owner but cannot afford to buy a vehicle as they have lower income. Further, not having a requirement that companies pass on some savings from the tax credit to their lessees is inefficient. For taxpayers who lease their vehicles without intrinsic motivation to drive a clean vehicle, there is no tax incentive for them to start leasing clean vehicles. Lessees’ exclusion from this tax credit is another way the tax system favors those who buy (mostly higher income taxpayers). Excluding clean vehicle lessees from the tax credit parallels the way our tax system favors homeowners over renters. However, overall, these tax credits for electric vehicles are a net positive as they incentivize the purchase of clean vehicles assembled in the US, which will help the environment by reducing greenhouse gas emissions.
Hopefully this cap will relieve many of the 1.3 million Americans in 2021 who rationed their insulin due to its prohibitive cost. However, until this cap applies to all individuals buying insulin and until the cap is reduced even further, it is likely that many Americans with diabetes will be forced to continue rationing their insulin because of its cost.
Another significant part of the IRA is that insulin is now capped at a $35 monthly copay and there is no deductible for insulin for those on Medicare. This is a win for those qualifying for this cap as the average out-of-pocket monthly cost of insulin for those on Medicare was previously $63. However, there is still a long way to go. This cap only applies to those on Medicare Part D: individuals 65 and up, those who have received social security disability insurance benefits for over 24 months, or those diagnosed with end-stage renal disease. In the US, 4.8% of individuals 18-44 and 18.9% of individuals 45-64 have diabetes, so over 8 million people in the US are likely left without this cap. Further, even paying $35 per month for something individuals with diabetes require to stay alive is cost prohibitive for many. Hopefully this cap will provide relief for many of the 1.3 million Americans in 2021 who rationed their insulin due to its prohibitive cost. However, until this cap applies to all individuals buying insulin and until the cap is reduced even further, it is likely that many Americans with diabetes will be forced to continue rationing their insulin because of its cost. Overall, the clean vehicle tax credits and the insulin cap are two very helpful benefits from the IRA that Americans will reap…if they can qualify.
Allie graduated from Texas Christian University (TCU) with dual degrees in Political Science and Psychology and a Business minor. A fun fact about Allie is that she has traveled to all 50 states! At UNC Law, Allie is the Treasurer for the Anti-Death Penalty Project and enjoys doing pro bono work.