What you should know before you buy a new electric vehicle

There are so many choices and considerations when purchasing a new vehicle, whether it's an electric vehicle (EV), a hybrid vehicle or an internal combustion engine (IC).

Here in the United States much current emphasis and conversation revolves around climate change and saving the environment by replacing fossil fuels with clean energy. Climate change is more and more important, necessary and demanding. The goal is a "clean energy economy."

With so many choices what will be your choice of new vehicle, EV, hybrid or IC? With the recent and continued advancement of electric and hybrid vehicles, the hopeful goal is to eventually replace the internal combustion vehicles.

In general, the new generation of electric vehicles are quieter, quicker and more refined and hopefully require less maintenance. This new generation of vehicles will be better for the environment by reducing carbon emissions. However, there is still considerable debate and discussion about the cost of replacing, recycling and disposing of the lithium batteries.

The auto industry, buoyed by many federal, state and local government incentives, continues making positive significant steps toward protecting the environment. The current presidential administration's goal through manufacturing and tax incentives is for two-thirds of the new cars and trucks be some type of electric vehicle by the year 2032.

The recently enacted Environment and Inflation Reduction Act of 2022 provided some very specific income tax incentives for individuals and businesses when considering whether to purchase a new (and/or used) electric/hybrid vehicle. For 2023, these clean vehicle credits are available through 2032.

However, these updated and ever-changing credits are becoming substantially more limited than the original enacted credits adopted last year. Fewer taxpayers will be able to claim these credits due to qualification requirements such as income levels and fewer qualifying vehicles. It's estimated that there are 23 eligible vehicles built in North America from about 20 major auto manufacturers.

Accordingly, there are complex and ever-changing IRS rules and guidelines as to the type of vehicle and income limitations for nonbusiness use. Business taxpayers buying an electric vehicle can choose either the new clean vehicle credit or the qualified commercial clean vehicle credit.

For individuals (nonbusiness users) for this 2023 tax year with the most recent IRS legislative enactments, the maximum credit is $7,500 but with two components. First and most importantly, the electric vehicle must satisfy the domestic content for battery components. Therefore, most of the current electric vehicles will qualify for the limited income tax credit of $3,750.

Second, eligible buyers must meet certain "modified adjusted gross income thresholds to qualify, $300,000 for joint return filers and surviving spouses, $225,000 for heads of household, or $150,000 for unmarried and married taxpayers who file separately."

Finally, there are vehicle price caps. The new IRS rules do not allow clean vehicle credits if the manufacturer's suggested retail price exceeds $80,000 for a van or sport utility vehicle or pickup truck, and $55,000 for any other vehicle.

And finally, the electric vehicle must contain significant domestic parts including the battery components and domestic assembly. The final assembly must occur within North America. These three criteria restrict and limit the available tax credits to foreign manufactured/assembled vehicles.

In summary, these ever-changing tax credits are becoming increasingly restrictive favoring domestic parts, production and assembly.

Consumers have many considerations beyond tax credits when purchasing a new vehicle, such as family, make, model, style, price, range, driving preferences, costs of charging options, manufacturer warranties and affordability. Electric vehicles are not new to the consumers. The auto industry is changing for this global transition to electric vehicles. These income tax credits will significantly push the electric option and help more mainstream consumers.

The IRS website is https://www.irs.gov/credits-deductions/manufacturers-and-models-for-new-qualified-clean-vehicles-purchased-in-2022-and-before for specific lists of vehicles. Always excellent sources of information are consumer-oriented publishers like Consumer Reports, Cars.com, etc.

• Daniel P. Vargo, CPA is the founder of Daniel P. Vargo & Associates in Warrenville.