If you have ever wanted to buy an EV, it may be a good time to take the plunge!

Over the past year, not only has there been a considerable drop in EV prices but tax credits that are now available to buyers has made this a great time to purchase.  If EV's are not your thing, there are other credits available for making energy efficient improvements to your home. In this entry we will look at the latest changes in legislation that make buying an EV attractive as well as the other energy tax credits available to you under the Inflation Reduction Act of 2022.  My hope is that by reading this, the reader can use this information in their tax planning.

Why is now a good time to buy an Electric Vehicle (EV)?

Since 2021, the prices for brand new Tesla Model Y have dropped by 23%.  In Feb 2021, the sticker price for the Tesla Model Y would have cost you $59,990; in Mar 2023, that same model has been made available for $46,900--a reduction of $13,000.   Elon Musk had eluded to dropping the prices sometime 2022 and it appears that he is a man of his word.

In addition to the drop in price, The Clean Vehicle Credit which is now available offers a credit of up to $7,500 for new vehicles.  This means that you could purchase a Tesla Model Y for about $39,400 which is lower than the average new car price during 2023.

Inflation Reduction Act of 2022

The Inflation Reduction Act is the most significant climate legislation in U.S. history, offering funding, programs, and incentives to accelerate the transition to a clean energy economy and will likely drive significant deployment of new clean electricity resources.

• Most provisions of the Inflation Reduction Act of 2022 became effective 1/1/2023.
• The goals of the Inflation Reduction Act are as follows;
  • Reduce the deficit to fight inflation
  • Invest in domestic energy production and manufacturing
  • Reduce carbon emissions by 40% by 2030
• The Act aims to reduce the deficit by $300B a net of the following:

Raising +$739B in revenue through

• $313B--15% minimum Corp Tax rate
• $288B—Prescription Drug Pricing Reform
• $124B—IRS Tax enforcement
• $14B—Carried Interest Loophole

Investment of -$433B in:

• $369B--Energy Security and Climate Change
• $64B--Affordable Care Act Extension

Blah, blah, blah--who cares?!  Get to the credits!

Under the Inflation Reduction Act passed at the end of 2022, there are certain rules to be aware of when making a decision on which EV to purchase:

To qualify, you must:

• • Buy it for your own use, not for resale
  • Use it primarily in the U.S.
• Modified adjusted gross income (AGI) may not exceed:
  • $300,000 for married couples filing jointly
  • $225,000 for heads of households
  • $150,000 for all other filers

You can use your modified AGI from the year you take delivery of the vehicle or the year before, whichever is less. If your modified AGI is below the threshold in 1 of the two years, you can claim the credit. The credit is nonrefundable, so you can't get back more on the credit than you owe in taxes. You can't apply any excess credit to future tax years.

Other Energy Credits available

In addition to the changes to the Clean Vehicle Credit, there are other Energy Credits available for people who are interested in installing things like solar panels or make energy efficient improvements to their homes.  The Inflation Reduction Act has made some changes (increases in most cases) to the amount of credit available for these things. The Residential Clean Energy Credit is available for those who wish to install solar panels, solar water heaters, fuel cells, etc..  Below are the expenses that qualify for these credits and the amounts: Expenses that qualify:

• Solar, wind and geothermal power generation
• Solar water heaters
• Fuel cells
• Battery storage (beginning in 2023)

• The amount of the credit you can take is a percentage of the total improvement expenses in the year of installation:
  • 2022 to 2032: 30%, no annual maximum or lifetime limit
  • 2033: 26%, no annual maximum or lifetime limit
  • 2034: 22%, no annual maximum or lifetime limit

The Energy Efficient Home Improvement Credit can be claimed by people who make qualifying improvements to your home. Homeowners who improve their primary residence will find the most opportunities to claim a credit for qualifying expenses. Renters may also be able to claim credits, as well as owners of second homes used as residences. The credits are never available for improvements made to homes that you don't use as a residence. These expenses may qualify if they meet requirements detailed on energy.gov:

• • Exterior doors, windows, skylights and insulation materials
  • Central air conditioners, water heaters, furnaces, boilers and heat pumps
  • Biomass stoves and boilers

The amount of the credit you can take is a percentage of the total improvement expenses in the year of installation:

• • 2022: 30%, up to a lifetime maximum of $500
  • 2023 through 2032: 30%, up to a maximum of $1,200 (biomass stoves and boilers have a separate annual credit limit of $2,000), no lifetime limit

Conclusion

If you have been considering buying an electric vehicle or making an energy efficient upgrade to your home, now may be the time to "pull the trigger".  Congress has passed the Inflation Reduction Act to create incentives for people to switch to more energy efficient and low-carbon living.   It's important to consider the requirements to receive the credit before spending your money.  This entry has provided the "broad strokes" of the credits available but some of the details have been omitted so as not to bore you to tears with my "tax talk".  If you are considering purchasing an EV or making an upgrade please feel free to reach out to me or your regular CPA or tax consultant before doing so.  We can ensure that you've got any documentation necessary when it comes time for tax filing.