Thanks to the Inflation Reduction Act, the federal EV tax credit has changed. It’s still possible to claim $7,500 off the cost of new plug-in vehicles, but the eligibility criteria has had a complete overhaul. There are a lot of changes, some good and some bad, but the key thing buyers need to know is that the list of eligible cars is now a lot smaller than it used to be.
We heard that the EV tax credit would be changing a few weeks back, as part of the Inflation Reduction Act, which President Joe Biden just signed into law on August 16. While it was originally reported that changes to the credit wouldn’t happen until January 1 2023, some of them have already gone into effect (opens in new tab).
Here’s what you need to know about the new EV tax credit — now known as the Clean Vehicle Credit.
What were the previous eligibility criteria?
The previous EV tax credit rules were pretty lax. The main qualifier was that the car weighed under 14,000 pounds, had a battery with a capacity of at least 5 kWh and could only be recharged by plugging it in. This applied to electric cars and hybrids, with credits ranging from $2,500 to $7,500.
To qualify for the full $7,500 credit, the car needed to have at least 70 miles of battery range and combined CO2 emissions under 50g/km. Since every electric car on the market meets those criteria, it only really impacted plug-in hybrids.
Cars also stopped being eligible once they reached a sales cap of 200,000 eligible vehicles. However only three companies actually reached that cap: Tesla, General Motors and Toyota.
What are the new EV tax credit eligibility criteria?
The Inflation Reduction Act outlines various changes to the EV tax credit, some of which are effective immediately, others that are not. It’s all staggered, with the general goal of encouraging EV adoption and bringing more EV and battery production to the United States.
As of August 16, a car has to have undergone final assembly in North America (the U.S., Canada and Mexico).
The expanded credit’s renaming to “Clean Vehicle Credit” is not just a linguistic flourish either, since it will apply to any “clean” vehicle. Primarily that’s electric cars and plug-in hybrids, but also includes hydrogen fuel cell cars that meet all the other criteria. However hydrogen cars are rare, and the models actually on sale in the U.S. are all assembled in Asia, meaning none are eligible at this time.
What eligibility changes are coming in the future?
The most anticipated change coming to the EV tax credit is that the 200,000 unit sales cap is being lifted on January 1 2023. That means any new car made by Tesla, General Motors or Toyota, that meets all the other eligibility requirements, will be entitled to the full $7,500 tax credit.
But this will depend on those cars meeting the other incoming eligibility criteria, which will start getting pretty strict in the new year. The specifics of these criteria haven’t been officially confirmed, and it’s up to the IRS to draw up and outline exactly what’s changing.
From what we’ve heard so far, one of the changes will be a tax credit cap based on the price of a vehicle and the income of the person who purchased it. Cars with an MSRP over $55K won’t be eligible, while trucks have an $80K MSRP cap. Single tax filers earning over $150K won’t qualify either, though that number increases to $225K for heads of households and $300K for joint filings.
The biggest obstacle to claiming the tax credit will reportedly start in 2024, when stricter American-made conditions comes into play. Previous reports suggested that this will require 40% of battery materials to be sourced from North America or a country the U.S. has a free-trade agreement with. By 2029 this will extend to insist 100% of battery components are made in North America.
Any batteries with minerals “extracted, processed, or recycled by a foreign entity of concern” will be ineligible. That category currently includes China, which reportedly controls around 79% (opens in new tab) of the world’s existing lithium-ion battery manufacturing capacity.
Finally, from sometime in 2024 it will be possible to claim your tax credit at the point of purchase, effectively giving buyers a discount. However this will be limited to approved dealers, and therefore won’t be universally applicable.
Which cars are eligible under the new rules?
The U.S. Department of Energy has released a list of cars (opens in new tab) that have final assembly in the North America, and may meet the current tax credit criteria. It’s not as extensive as the previous list, but it does include a number of electric and plug-in hybrid (PHEV) vehicles.
This list is not final, and more cars will become eligible should their production be brought to North America.
- Audi Q5 PHEV
- BMW 3-series 330e PHEV
- BMW X5 xDrive 45e PHEV
- Chrysler Pacifica PHEV
- Ford Escape PHEV
- Jeep Grand Cherokee PHEV
- Jeep Wrangler PHEV
- Volvo S60 T8 Recharge PHEV
- Lincoln Aviator PHEV
- Lincoln Corsair PHEV
- Ford F-150 Lightning
- Ford Mustang Mach-E
- Ford E-Transit van
- Lucid Air
- Nissan Leaf
- Rivian EDV van
- Rivian R1S
- Rivian R1T
- Mercedes EQS
In total there are nine electric vehicles and 10 plug-in hybrids that may be eligible right now — for a total of 19. Which is quite a bit less than the 72 cars that were eligible before August 16.
Below are nine electrified vehicles that are assembled in North America, but are currently only ineligible because the manufacturer already hit the 200,000 sales cap. Provided they meet all the other criteria, these cars could qualify for the tax credit in 2023.
- Chevy Bolt EUV
- Chevy Bolt EV
- GMC Hummer EV Pickup
- GMC Hummer EV SUV
- Tesla Model 3
- Tesla Model S
- Tesla Model X
- Tesla Model Y
- Cadillac Lyriq
It's worth noting that a number of cars on the list cost more than the outlined $55K and $80K sales cap. The Lucid Air, for instance, starts at $87,400, while the Cadillac Lyriq starts at $62,990. Assuming those caps remain in place, it means the list of eligible EVs is going to get even shorter.
It's also worth remembering that these cars might meet the final assembly requirements. Since automakers can build their cars in multiple locations, that may not be the case for every single car produced.
For that reason the government advises you to check a car’s VIN number with the NHTSA’s VIN Decoder (opens in new tab) tool. That will confirm the manufacture location of that individual car.
What if you just ordered an electric car, but haven’t received it yet?
The waiting list for new cars is pretty long at the moment, electric or not. Supply chain issues have had a big impact on the auto industry, so there may be quite the gap between ordering a car and it being delivered. If you’re one of those people, the news that the tax credit has now changed may be a little worrying — or irritating, depending on your disposition.
But there is good news for those people, because according to the IRS (opens in new tab) you can still claim the tax credit under the old pre-August 16 rules. This applies to anyone that “entered into a written binding contract to purchase a new qualifying electric vehicle before August 16, 2022, but do not take possession of the vehicle until on or after August 16, 2022.”
The “written binding contract” part means this doesn’t apply to people who have reserved a car or put down a refundable deposit. According to the IRS you need to have parted with a “significant” non-refundable deposit or down payment before August 16. The agency defines that as at least 5% of the final price.
What about the used electric car tax credit?
Up until now electric car incentives have focussed on new models, and limits the savings to people who can afford to buy a brand new car. That limits adoption, more so when you remember that EVs are generally more expensive than gas-powered counterparts.
So, come January 1 2023, used electric cars will be eligible for their own tax credit. Provided it doesn’t cost more than $25,000, that is. The credit is worth up to $4,000, or 30% of the vehicle’s total cost, whichever is lower. The credit only applies to used cars that are at least two years old, and won’t qualify for cars that were purchased specifically to resell.
So far there's been no word on restrictions based on manufacturer, or assembly location. But this could change.
So that used Tesla selling for more than the MSRP likely won’t be eligible, nor will you be able to write off most of the cost of that ancient Nissan Leaf you spotted on Craigslist. More specific information with definitive language and criteria will no doubt be published by the IRS in the coming months.
Next: Hybrid and electric cars can regain some lost power through regenerative braking. But what is regenerative braking and how does it work? We'll tell you everything you need to know about it. And I took a 500-mile trip in an EV — but range anxiety was the least of my problems. You can also read about what happened when my car's infotainment system broke. Also check out why now is the worst time to buy a Tesla.