The new Clean Vehicle Credit...and how it is an attack at China

When tax time rolls around, most people aren't thinking about why certain tax credits exist. They just want to know if they qualify to receive them and how to go about making that happen. Well...if you plan on buying an electric vehicle, two things you need to know.

1. Starting January 1, 2023, the credit for electric vehicles got a little bit sweeter.
2. You can thank China and other "foreign entities of concern".

Read on to learn a bit more about the new credit and how it relates to China.

History

The Inflation Reduction Act of 2022 contains quite a few provisions that either introduce new credits or modifies existing ones. For now, we're focusing on the Clean Vehicle Credit. Prior to the enactment of the Act, you could claim a credit for a new qualified plug-in electric drive motor vehicle (NQPEDMV). Side note: Why in the world would someone come up with an acronym that long? I'm not sure it is any easier than simply saying all the words. However, this former credit was limited to the first 200,000 units sold in the United States. If you were lucky buyer number 200,001...well, you just missed out. Now, the limitation is gone and so is the unnecessarily long acronym. It's just the Clean Vehicle Credit. Also, vehicles manufactured by General Motors and Tesla were excluded from the credit. They're now eligible for the newly named Clean Vehicle Credit.

Amount of Credit

So, what do you get with this Clean Vehicle Credit? Well, you get a credit of $3,750 for meeting the critical minerals requirements and $3,750 for meeting the battery component requirement. That's a total of $7,500 that the government is subsidizing toward your electric vehicle.

Requirements

Critical Minerals Requirement: The minerals in the battery that were either (1) extracted or processed in the US or any country with which the US has a free trade agreement or (2) recycled in North America must be EQUAL TO OR GREATER THAN a threshold that starts at 40% in 2023 and increases each year by 10% until it reaches 80% in 2027 and beyond.

Battery Components Requirement: The value of the components of the battery manufactured or assembled in North America must be EQUAL TO OR GREATER THAN a threshold that starts at 50% in 2023, holds steady at 60% for 2024 and 2025 and then increases by 10% until it reaches 100% in 2029.

Limitations

Modified Adjusted Gross Income: As with most things tax related, the benefit gets cut off if your income is too high for the year (or the previous year as well for this one).

• Married Filing Jointly - $300,000
• Head of household - $225,000
• All others - $150,000

Vehicle MSRP

• Van - $80,000
• SUV - $80,000
• Pickup Truck - $80,000
• Everything else - $55,000

And...how does China fit into this?

If you're asking yourself why these changes were made, the answer is simple...China. The state (that is, the US government) uses tax code to incentivize its constituents to behave in certain ways. In this case, the constituents are the electric vehicle manufacturers. The former credit (the one with the crazy long acronym) only focused on what was good for the environment. Since much of the world's battery supply chain is dependent on China, manufacturers could source the battery from China and sell the car in the US with the help of US subsidies. Go back and look at the requirements section. See all the mentions of where the components must come from? That's the US telling manufacturers: "Move your battery supply chain operations out of China (and Russia) if you want us to continue to subsidize your sales."