How the New EV Tax Credit Will Affect Your Auto Loan | Car loans and advice
Big changes are coming to the electric vehicle tax credit in 2023.
The Inflation Reduction Act, signed into law by President Joe Biden this summer, renews a tax credit of up to $7,500 for new electric vehicles through 2032 and introduces a credit of up to $4,000 for used electric vehicles. The law also requires final assembly of your electric vehicle in North America, and the vehicle battery must meet certain conditions to qualify. These requirements will significantly reduce the number of vehicles eligible for the electric vehicle tax credit.
At the same time, the law removes a provision that caps the number of vehicles eligible for the tax credit that a manufacturer can sell at 200,000. This releases the restriction on high-volume U.S. automakers such as Tesla, which hit the manufacturer cap several years ago.
When it comes to auto loans, the biggest update for car buyers is that the tax credit will be available at the point of sale in 2024. Allowing the dealership to collect the credit for the buyer will effectively reduce the price displayed – meaning buyers looking to finance their purchase will need to borrow less money.
Here’s what to know if you’re considering using the new tax credit for buy an EV.
New EV tax credit rule means interest savings on car loans
Instead of claiming the EV credit on tax returns, consumers will soon be able to transfer it to a dealership and use it to reduce the price of a vehicle. For buyers considering financing their EV purchase, this translates into significant interest savings.
Here’s an example: a car buyer who takes out a five-year $40,000 auto loan at 9% interest rate can expect to pay $9,820 in finance charges over the life of the loan. But if you can reduce the listed price and the loan amount by $7,500, the total interest paid would be $7,979. This represents an additional savings of $1,841.
A lower loan amount also means lower monthly payments for car loan borrowers. Using the same numbers in the example above, a car buyer could save $155 on monthly payments by claiming the EV tax credit at the point of sale.
But remember that this new way to use the EV tax credit won’t start until 2024. If you can, wait a little longer to buy an EV and use a car payment calculator to estimate your potential savings.
Which cars can benefit from the tax credit for clean vehicles?
Although the electric vehicle tax credit may be easier to claim in future years, buyers may have a harder time find a vehicle which qualifies for the credit. The Reducing Inflation Act established more restrictive eligibility requirements for claiming the clean vehicle credit in the future:
- Domestic assembly. Final assembly must take place in North America, including the United States, Canada or Mexico.
- Battery Type. At least 40% of critical minerals used in electric vehicle batteries must either be recycled domestically or mined or processed in the United States or a free trade partner, which will increase to 80% by 2027. Half or more of the battery components must be manufactured or assembled. in North America, increasing to 100% by 2029.
- Sticker price. SUVs, vans and trucks are capped at the manufacturer’s suggested retail price of $80,000, while all other new cars can’t cost more than $55,000 if you want to claim the credit. For used vehicles, the maximum purchase price is $25,000.
- Income Limits. The buyer’s modified adjusted gross income is capped at $150,000 for individuals, $225,000 for heads of households and $300,000 for joint filers. For used EV purchases, the income thresholds are below $75,000, $112,500 and $150,000, respectively.
Here is a list of some popular 2022 vehicles that may qualify for the updated electric vehicle tax credit:
|Electric vehicles||Plug-in electric vehicles|
|Cadillac Lyriq*||Audi Q5|
|Chevrolet Bolt*||BMW 330e|
|Ford E-Transit||BMW X5|
|Ford F-150 Lightning||Chrysler Pacifica|
|Ford Mustang Mach-E||Ford Escape|
|Nissan Leaf||jeep grand cherokee|
|Rivian EDV 700||Jeep Wrangler Unlimited|
|Rivian R1T and R1S||Lincoln Aviator|
|Tesla Model 3*||Lincoln Corsair|
|Tesla Model Y*||VolvoS60|
|* From 2023, when the manufacturer cap is removed.|
You can find a complete list eligible vehicles on the Department of Energy website.