Looking to take advantage of the federal tax credits for new and used EVs, but aren’t sure how, or which models qualify? Here is everything you need to know.
Table of Contents
- When you can claim the tax credit (and when you can’t)
- Which EVs are likely eligible for the tax credit?
- Affordable EVs prioritized
- Used EVs now qualify for the Federal EV Tax Credit
- No more popularity penalty on EVs
- You can claim the EV tax credit at the dealership!
- Audi, Porsche, Kia, and most VWs no longer qualify for EV tax credit
- Battery component requirement
- What about PHEVs?
- Should you buy an EV in 2022?
On August 7th, 2022, the U.S. Senate passed the landmark Inflation Reduction Act. This far-reaching bill looks to take on climate change, in part, by incentivizing electric vehicles and solar.
For anyone looking to buy an electric vehicle (EV), though, the big news is that the bill offers tax credits up to $7,500 for new EVs and $4,000 for used EVs through to 2032.
The catch is that very few EVs are eligible for the tax credit under the new rules, at least currently. For now, the best way to tell if an EV will qualify for the new tax credit is to talk to a dealership and contact manufacturers directly. Those that do still qualify are likely to launch advertising campaigns very soon so as to capitalize on a market that will narrow significantly, at least in the short term.
In this post, we break down the small print to figure out which EVs qualify for the 2022 Federal EV Tax Credit, AKA the Clean Vehicle Credit, and which models to look out for in the years to come.
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When you can claim the tax credit (and when you can’t)
To claim the EV tax credit there are EV price limits, income limits, and manufacturing criteria that all must be met.
First, the good news for anyone wanting to buy an EV:
- The bill extends EV tax credits for ten years, until 2032
- The 200,000 sales cap on vehicles will be scrapped from January 1, 2023, putting popular Tesla and GM models back in the game for EV credits
- From 2024 onwards, you’ll be able to claim the tax credit at the dealership, lowering your upfront cost to buy an EV
- From 2023 onward, you can apply the tax credit to used EVs, reclaiming up to $4,000 or 30% of the purchase price on used EVs costing $25,000 or less
- The new program includes tax credits for plug-in hybrids with a battery of 7 kWh capacity or greater.
Now for the bad news. Under the new rules, you can only claim the EV tax credit if:
- You buy an EV priced at $55,000 or less, or buy an SUV or light truck priced at $80,000 or less (from January 1, 2023)
- Your modified adjusted gross income in the year of purchase or preceding year is no more than $150,000 if filing singly; $225,000 for a head of household; or $300,000 if you’re filing jointly
- For used EVs, the purchaser’s income is limited to $75,000 for a single filer, $112,500 for a head of household, and $150,000 for joint filers
- The EV is assembled in North America, which for the bill’s purposes includes Mexico, the U.S., and Canada (effective immediately)
- The EV’s battery is assembled in or made from materials sourced in North America or an approved country (though this rule will only apply from January 1, 2025)
- At least 40% of the “critical minerals content” comes from U.S. sources, is recycled in North America, or comes from a country with a free trade agreement with the U.S. (from January 1, 2023, with annual increases in minimum content requirements thereafter).
Some practical implications to mention:
- Very few models qualify. Trade organizations estimate that 70% of currently available EVs fail to meet the new criteria, meaning prospective buyers face a bleak year or two where the EV tax credit will actually be harder to claim than before.
- Partial tax credits may be the rule. Some EVs only qualify for half of the tax credit by only partly satisfying the new criteria.
- Minimum income. We should also note that to take full advantage of the EV tax credit, most purchasers need to be making at least $66,000 in the year of purchase. Otherwise, your tax burden will likely be too low to claim the full $7,500. According to a study by researchers at the University of California, Davis, more than 1 in 10 EV buyers (13%) overestimated their tax credit eligibility.
Which EVs are likely eligible for the tax credit?
It’s gotten a lot more complicated to figure out if the EV you’re thinking of purchasing will net you that prized $7,500 tax credit. And the bad news is that it’s only going to get more complicated in 2023 and beyond.
Based on a statement from the AAI there should be at least 20 vehicles that qualify in 2022. However, so far, no EV manufacturer has publicly stated that its vehicles will be eligible under the new rules.
The following EVs seem likely to qualify for at least part of the tax credit, based on where they’re manufactured and how they’re made:
- Cadillac Lyriq – made in America with GM’s Ultium batteries
- Chevrolet Bolt – made in America using Ultium batteries made in Michigan
- Chevrolet Blazer EV – will be made in America, powered by Ultium batteries
- Chevrolet Equinox EV – made in America with Ultium batteries
- Chevrolet Silverado EV – made in America with Ultium batteries
- Honda Prologue – made by GM in America using Ultium batteries
- Nissan Leaf – made in Tennessee, but possibly destined for retirement soon
- Tesla Model 3 – built in Fremont, CA
- Tesla Model Y – made in Texas and California, using batteries made in the U.S.
- Volkswagen ID.4 – some are assembled in Tennessee, using batteries made in Georgia.
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Affordable EVs prioritized
The new rules have been designed to incentivize affordable EVs, though, which means there are new restrictions on the cost of eligible vehicles.
To qualify for the tax credit, the manufacturer’s suggested retail price (MSRP) must be no more than $55,000 for a standard EV, or $80,000 for an electric Sports Utility Vehicle (SUV) or light truck. Note the language here: you may miss out if you buy an EV for $55,000 that was discounted from the MSRP $60,000.
Used EVs now qualify for the Federal EV Tax Credit
For the first time, anyone buying a used EV in the U.S. can also claim the EV tax credit. This is worth up to $4,000 or 30% of the purchase price of a used EV that costs $25,000 or less.
Note that the credit is only available for the first sale of a used vehicle and the car must be more than two years old. Under the new rules, you can only claim the tax credit once every three years.
As with the tax credit for new EVs, there are income limits for purchasers of used EVs. For anyone filing singly, you can only claim the tax credit if your income is $75,000 or less in the year of purchase or the preceding year. The limit increases to $112,500 for a head of household, and $150,000 for folks filing jointly or a surviving spouse.
Used EVs don’t have to meet the same criteria regarding battery components and critical mineral sourcing as new EVs, an issue I touch on more later in this piece. However, very few used EVs come in under that $25,000 price cap. As such, it seems likely that the only used EVs that will qualify for the new federal EV tax credit will be Nissan Leafs and Chevy Bolts.
No more popularity penalty on EVs
The Inflation Reduction Act scraps what some call the ‘popularity penalty’ on EVs. This purchase cap saw tax credits decrease and then end for any brand of car that reached 200,000 sales. Tesla and GM reached that cap years ago, meaning anyone buying EVs from those carmakers couldn’t claim the credit.
Toyota also met that cap recently and is due under current rules to become ineligible for the tax credit from September 2023. Ford is also very close to reaching the cap, causing anxiety in consumers unsure if they’d get the credit come tax time.
Under the new rules, the credits will be reinstated for all carmakers as of January 1, 2023, as long as the EVs meet other eligibility criteria. This removes what had become, in essence, a $7,500 penalty hindering sales of Tesla and GM.
Note, however, that unlike with the other new rules, this one only goes into effect for EVs purchased January 1, 2023, onward. Don’t be caught out and rush to buy a Tesla only to find you won’t get that $7,500 after all.
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You can claim the EV tax credit at the dealership!
Perhaps the biggest change to the EV tax credit is the ability to claim the incentive upfront. Instead of having to recoup the cost come tax-time, consumers can work with a dealership to figure out their likely tax break and knock that off the purchase price at the point of sale. This rule goes into effect January 1, 2024, however, to give dealerships time to work out the details.
This is a huge incentive that helps lower the upfront price of an EV, improving affordability for more people. Canada has been using this point-of-sale approach to EV tax credits for many years.
The trouble, of course, is that you’ll need to be relatively certain of your tax situation for the year. At this point, it’s not clear how the Internal Revenue Service (IRS) will go about reclaiming the tax credit when you file, should you have miscalculated at the dealership. For anyone buying early in a financial year, this could cause a headache down the line, so be sure of the math, especially if your EV dealer is leaning heavily on the tax credit as a sales technique.
Audi, Porsche, Kia, and most VWs no longer qualify for EV tax credit
Once the Inflation Reduction Act becomes law, the majority of EVs for sale in the U.S. will become ineligible for the EV tax credit. The Alliance for Automotive Innovation, a trade group that represents VW, GM, Toyota, Ford, and others said the law would make 70% of 72 currently eligible U.S. EVs and PHEVs ineligible.
On January 1, 2023, the bill’s additional income and price caps and battery and critical mineral sourcing rules go into effect. After this, the AAI says, “none [of the 72 EVs or PHEVs] would qualify for the full credit when additional sourcing requirements go into effect. Zero. “
Audi of America, Porsche, and Kia have all warned that their vehicles don’t satisfy the new “made in America” rules, while Volkswagen has said only its Audi PHEV will be eligible for the credit.
VW owns Porsche and has said that its electric Taycan and in PHEV Cayenne and Panamera will no longer be eligible for the tax credits once the bill is signed by the President.
Language in the bill does allow customers to claim the EV tax credit under current rules if they have already signed a binding contract before the act becomes law. This has prompted some automakers to push sales hard to those customers currently on waitlists for their vehicles. Many prospective EV buyers have been on such waitlists for months or even years due to supply chain issues affecting EV availability.
John Bozzella, the President and CEO of the Alliance for Automotive Innovation, says the organization shares the bill’s goals of increasing domestic supply chains and capacity in the EV sector. However, he suggests a better way to go about this would be to phase in the critical materials and battery components requirements and expand the list of countries from which these can be sourced. Namely, the AAI suggests broadening criteria to allow for sourcing from NATO members and those with collective defense agreements with the U.S., such as Japan.
The European Union and South Korea have also expressed concerns that the bill, as it stands, contravenes World Trade Organization (WTO) rules and existing bilateral free trade agreements. Under the new rules, countries with free trade agreements with the U.S. would qualify as suppliers of the critical minerals but not the battery components.
Supporting the U.S. EV industry
The Inflation Reduction Act has two broad goals when it comes to EVs: to support consumers in switching to clean, green vehicles and to help expand the domestic EV manufacturing sector. The trouble is that the bill may backfire on both counts.
Because the income and cost requirements go into effect immediately and the requirements for domestic sourcing and final assembly go into effect so quickly, manufacturers and trade associations are predicting a steep drop in the sale of EVs. This is because many consumers do rely on that $7,500 to make it worthwhile to buy an EV, and most EVs won’t qualify for the tax credit for at least a few years, if ever.
Under the new rules, half of the tax credit ($3,750) depends on where the EV’s battery components come from, and the other half depends on the source(s) of critical minerals. All EVs must undergo final assembly in the U.S. to qualify for the tax credit.
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Battery component requirement
To be eligible for the EV tax credit, a vehicle placed in service before January 1, 2024, must have a battery made with at least 50% of its components manufactured or assembled in North America. This percentage increases to:
60% for EVs or PHEVs placed into service during 2024 and 2025
70% for EVs or PHEVs placed into service during 2026
80% for EVs or PHEVs placed into service during 2027
90% for EVs or PHEVs placed into service during 2028.
After December 31, 2028, any EV or PHEV placed into service must have 100% of its battery components manufactured or assembled in North America in order for the EV to qualify for the tax credit.
Critical minerals requirements for EV tax credit
To be eligible for the EV tax credit, a car placed into service must have a battery made using the following percentages of critical minerals:
- 40% before January 1, 2024
- 50% for a vehicle placed into service in 2024
- 60% for a vehicle placed into service in 2025
- 70% for a vehicle placed into service in 2026
- 80% for a vehicle placed into service after December 31, 2026.
Notably, while the requirements for the percentage of critical minerals in a battery are similar to those for battery components, these requirements can be satisfied by domestic suppliers, countries with a free trade agreement with the U.S., and minerals recycled in North America.
Where do EV batteries come from?
The new rules state that a vehicle won’t qualify for the tax credit if any materials or components (including critical minerals) are sourced from ‘foreign entities of concern’. This includes both Russia and China, which poses a big problem for many automakers.
A recent analysis from Benchmark Intelligence, which tracks the battery industry, found that China controls:
- 81% of global cathode manufacturing capacity
- 91% of global anode capacity
- 79% of global lithium-ion battery manufacturing capacity.
In contrast, the U.S. has just:
- 0.16% of cathode manufacturing capacity
- 0.27% of anode manufacturing capacity
- 5.5% of lithium-ion battery manufacturing capacity.
Clearly, the requirement for at least 50% of EV battery components to be manufactured or assembled in the U.S. by 2024 represents a big challenge for the automotive industry.
Supporting domestic battery production. The good news is that both the Inflation Reduction Act and an earlier bill include measures to support the domestic production of batteries and EVs. For instance, the Infrastructure Investment and Jobs Act of 2021 included $7 billion in grants to accelerate the development of the U.S. battery supply chain. There’s also a $3 billion expansion of the Advanced Vehicle Manufacturing Loan Program included in the Inflation Reduction Act.
Materials also qualify under the new rules if they’re recycled in the U.S. Currently, there’s little capacity for recycling EV batteries stateside, but a recycling facility currently being built in Nevada by Redwood Materials aims to supply enough cathode and anode materials to support 1 million EVs by 2025 (it currently recycles enough to support around 60,000 EV batteries). The bulk of EV battery components will still need to come from virgin resources, however, making recycling more of a long-term solution that needs to happen in tandem with more immediate action.
It will take time, though, to build capacity in the domestic EV industry, and part of this will rely on short-term sales. If EV sales drop, however, the market as a whole could stumble this year and next.
On the flip side, any automakers that manage to satisfy the new criteria have an immediate advantage that could cause a spike in sales in the next few months and years.
What about PHEVs?
As with EVs, it’s not clear which, if any, PHEVs will qualify for the new federal tax credit. Chances are, though, that the BMW X5 and X3 will qualify for at least some of the credit as these are made in South Carolina.
The Chrysler Pacifica Hybrid may also qualify as this is made in Ontario, Canada, using batteries put together in Michigan. The Jeep Wrangler 4xe is also a decent bet as it is made in Ohio.
For the most part, however, even fewer PHEVs will be eligible for the tax credit than EVs.
Should you buy an EV in 2022?
There are several ways to look at the changing landscape of EV tax credits in the U.S. How you view the new rules will depend largely on your personal circumstances. For instance, if you’ve already found an EV you want to buy but have been on a waitlist for months, you may worry that your choice of EV will no longer net you the tax credit.
So, should you just jump into buying an EV before the end of August, when the bill will likely come into effect? Maybe.
If you’re already close to signing the contract, there’s probably no harm in going ahead before the bill becomes law, depending on the make and model you’re buying. In almost all cases, buying now will mean you’ve locked in your price and the tax credit even if the vehicle isn’t eligible under the new rules.
However, if you’re considering buying an EV or SUV that isn’t currently eligible for the tax credit because it has already met the purchase cap, hang tight. For instance, you may be waiting for a Tesla Model Y, which wouldn’t grant you a tax credit under the current law. However, with the purchase cap only removed on January 1, 2023, you may want to wait until then to buy a Tesla.
In general, however, if you are still undecided on which EV to choose, or don’t have the budget for one right now, don’t scramble to buy just because of the new bill. There is already a backlog of consumers who want EVs but can’t get them because of the limited supply. This means many dealerships have long waitlists and high mark-ups. These mark-ups could go even higher in the next few weeks as consumers panic about the tax credit and buy before they’re really ready. And if the mark-up is more than your likely tax credit, this entirely defeats the purpose of buying now.
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Yes, the number of EVs eligible for the credit will decrease sharply after the law goes into effect. But if the industry responds well, we could see significant price reductions and improvements in EV availability in the next few years. More EVs will also start to qualify for the tax credit, and the used EV market will likely grow substantially thanks to the expansion of the credit.
All in all, there’s not a huge risk in waiting to buy an EV. But if you’re in need of a new car right now and you know the one you want, move fast and sign that paperwork before the bill becomes law.