With the lifting of the “popularity penalty,” several sought after EVs will once again be eligible for the $7,500 Federal EV Tax Credit in 2023, including some Tesla models. Here is everything you need to know about which Tesla models qualify, and which fall short.
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Under the old EV tax rules, an electric vehicle was no longer eligible for a credit once 200,000 units of that model had been sold. Because of this “popularity penalty,” it’s been a few years since the federal EV tax credit was available for any Tesla vehicles, but that’s set to change once January 1st, 2023, rolls around. With the signing of the Inflation Reduction Act into law on August 16th, 2022, the ‘popularity penalty will disappear in 2023, reinstating the $7,500 tax credit for several eligible EVs, including some Tesla models.
Tesla’s tax credit hurdles
However, the popularity penalty isn’t the only hurdle to Tesla EVs once again qualifying for the tax credit. The new rules impose price, manufacturing, and income limits.
Made in USA manufacturing rules. From
January 1, 2023 March, 2023, new EVs not only have to be assembled in the U.S. to qualify at all, they also have to meet criteria for battery components and critical minerals to get the full tax credit. If an EV only meets one of these requirements, it nets you half the tax credit ($3,750). Teslas are some of the most ‘made in America’ vehicles currently available. According to the annual Cars.com America-Made Index, all four Tesla models are in the top 10 of most American cars. The Model Y tops the list, followed by the Tesla Model 3. The Model X and Model S occupy fifth and sixth place respectively.
See also: 14 American made EVs to watch
Tesla builds all four of its models (the S, 3, X, and Y) at its original plant in Fremont, California. The Model Y SUVs are also built at Tesla’s new factory in Austin, Texas, where the company is based.
EV price rules. The trick, though, is that, despite Tesla’s status as an American auto-maker, not all Tesla models will automatically net you the EV tax credit. In some cases, adding additional features will bump your Tesla above the $55,00 price limit for EVs or over the $80,000 price limit for SUVs, which will be disqualifying. It’s also not entirely clear which category (EV or SUV) some Tesla models will fall under.
Income requirements. Also keep in mind that the EV tax credit comes with income requirements, which we go into in great detail in our guide to the EV tax credit.
With all of that out of the way, here are the Teslas that could qualify for at least part of the EV tax credit in 2023.
2023 Tesla Model 3
Models: RWD Base model and Long Range AWD only
MSRP: $46,990 to $62,990
Basic rule: Tesla Model 3 Performance EVs and possibly the Long Range model won’t qualify for the tax credit, while more basic trims will.
One Tesla that should qualify for the federal Clean Vehicle Tax Credit in 2023 is the Tesla Model 3 (which would have been the Model E, if Ford hadn’t snapped up the snappy name first).
Only some Model 3 builds meet the price criteria, though.
The 2023 Model 3 RWD has a base price of $46,990, bringing it in under the cap of $55,000.
Tesla doesn’t have a price listed for the forthcoming 2023 Long Range AWD Model 3. However, this is likely to be close to $52,000, so should still sneak in under the price cap, assuming you don’t add on many extras. For the 2022 version of this build, the overall range is 358 miles. The combined MPGe is 131, with MPGe 134 for the city and 126 for the highway.
There is also a 2022 Tesla Model 3 Performance AWD but this has a base price of $62,990, meaning it doesn’t qualify for the tax credit under the new rules.
However, if for some reason the Model 3 is classified as an SUV, all of the builds would likely qualify at least based on price.
Why wait for a 2023 Model 3?
Per mile, the Tesla Model 3 is one of the cheapest EVs around. It has an excellent range, excellent MPGe, and incredibly good resale value. In fact, Consumer Reports (CR) found that a used 2021 Model 3 often costs more than it did new.
There are no specifications out yet for the 2023 Model 3, but Edmunds estimates that the cost of a 2023 Tesla Model 3 will start at around $48,000, with the 2023 Model 3 Long Range at $59,000 and the 2023 Model 3 Performance at $64,000.
At these prices, only some of the Model 3 EVs will qualify for the EV tax credit, depending on its classification.
The Model 3 may also be one of very few EVs that does qualify for the tax credit under new rules. So, if you’re interested, it may be wise to make a reservation now for delivery next year.
If you’re still on the fence, know that the Model 3 is the only Tesla recommended by Consumer Reports, based on customer satisfaction.
Tesla Model Y
MSRP: from $65,990
The Tesla Model Y is technically a small sports utility vehicle (SUV), which means it should qualify for the new EV tax credit based on price. For SUVs, the maximum MSRP is $80,000, which the base models and some builds fall nicely under.
For instance, the 2023 Tesla Model Y Long Range AWD starts at $65,990, while the 2022 Tesla Model Y Performance AWD starts at $69,990.
Tesla is currently taking orders for the Model Y for delivery in December 2022 to March 2023. Your best bet is to wait until January 1st to order, though, or you’ll miss out on a chance at the tax credit.
If the federal government decides to classify the Model Y as a regular EV, though, none of the builds will net you the tax credit.
Possible MSRP: $39,900 to $69,900
Ah, the Tesla Cybertruck. After a splashy announcement in 2019, there’s been little sign of the Cybertruck coming to market anytime soon. Initially, deliveries of the all-electric trucks were meant to begin in 2022, but that got pushed back to 2023, and now there’s talk that even this will be too soon.
When the Cybertruck does make it to market, there’s a chance it will qualify for the EV tax credit. At least, that is, if the MSRP stays under 80k, it’s made in North America, and the batteries and critical minerals are sourced to meet the IRA’s new requirements (in effect March, 2023).
If you can’t wait that long for the all-electric truck of the future, go for the all-electric truck available now, namely the Rivian R1T or Ford F-150 Lightning. These are a bit more conventional looking than the Cybertruck, but could net you the tax credit this year. Most Rivian R1T orders appear to be taking a couple of months to be delivered.
Tesla Hatchback (2023?)
Tesla has been promising to produce an affordable hatchback for $25,000 for a while now, but there’s no sign the luxury automaker will deliver on this anytime soon. There was talk of a 2023 launch, but there’s no sign of that happening.
It’s also not clear if the $25,000 price builds in an assumed tax credit, gas savings, or other incentives, and Tesla has a bit of a reputation for raising its prices after splashy announcements.
Given that the Cybertruck, Semi Truck, and Roadster are all suffering major delays, chances are the affordable Tesla hatchback is a way off.
The good news is that the EV tax credits have been extended until 2032, which might give Tesla enough time to launch at least one of its new models.
If the Tesla hatchback does come to fruition, all signs point to it being a rear-wheel-drive model with at least 250 miles of range. It will probably also use the new 4680 battery cells used in the 2022 Model Y, which should qualify it for at least part of the EV tax credit. Because these batteries are lighter than other batteries offering equivalent power, the fuel efficiency of the hatchback would also be better, allowing for that greater range compared to similarly sized vehicles.
Elon Musk has also mentioned that the hatchback would be fully autonomous, but that, like everything else, remains to be seen.
With a likely production timeline of at least three years, those interested in a hatchback EV might want to consider buying a Chevy Bolt in 2023 instead. This could net you the tax credit once the sales cap is lifted on January 1, and you could enjoy years of EV driving before trading your Bolt in for a Tesla should it ever arrive. Under the new rules, you can claim the EV tax credit once for every eligible vehicle.
Critical minerals and battery components and assembly
Tesla seems well positioned to meet at least one half of the requirements for critical minerals and battery components. This is because Tesla invested in development and production in California and Texas to produce its most recent battery, the 4680-type, for the made-in-Texas Model Y.
For the Model S and Model X, Tesla may still use the 1865-type NCA battery, which is made in Japan. Model 3 and Model Y vehicles made in California appear to use 2170-type NCA batteries made at the Gigafactory 1 in Nevada.
Under the new rules, any vehicle made with a battery that includes components from ‘foreign entities of concern’ (such as China and Russia) is automatically ineligible for the tax credit. Tesla does appear to still source some batteries from China, such as the 2170-type NCM and the prismatic LFP, but these are mainly used in Tesla models sold outside the U.S.
The critical minerals component of the new law is a bit more complicated. Tesla did release a list of nine mining companies it does business with worldwide, and just one of those would qualify under the new rules (Vale, in Canada). Many of the sources are mining operators in China, and Tesla signed two new deals with Chinese mining companies in August, 2022, just before the IRA was signed into law.
However, Tesla also appears to have secured its own rights to mine lithium in Nevada in 2020, after a deal to buy a lithium mining company fell through. Tesla also said in January, 2022, that it will buy 75,000 tons of nickel concentrate from Talon Metals Corp’s proposed Tamarack mine project in Minnesota, starting in 2026.
The new rules also allow for critical minerals to come from recycled sources. This is great news for Tesla, which already boasts capacity to reuse 92% of the raw materials in its battery packs. Tesla factories have an in-house, closed-loop recycling system that ensures 100% of Tesla batteries received are recycled and up to 92% of their raw materials are used.
As of December 19th, 2022, though, the IRA has issued guidance suggesting the critical minerals component of the tax credit won’t go into effect until March 2023 at least. This is because the IRA is still working to help manufacturers figure out how this part of the legislation will apply to their vehicles.
The bottom line
All in all, it’s not clear if any Tesla vehicles will qualify for the full $7,500 credit once all the new rules are in effect. However, those models listed above should at least qualify for $3,750 of the credit… after January 1, 2023, when the sales cap is lifted.
If you’re interested in buying a Tesla, you may be best to buy soon. Chances are that with the recent delay on the critical mineral and battery component part of the new law, many more Teslas (and GM EVs!) will qualify in January and February, making the early part of 2023 a great time to buy a Tesla or Chevy Bolt!
Where are you getting that price (59k) for a model Y?
They are 65,995.00 for the base on their website.
The $59k price was for the 2022 build, which was the only pricing available when I first wrote this piece. I’ve updated it to reflect the current pricing at Tesla as of December 2022.
Note, though, that the Tesla website automatically shows a price with assumed tax credits and potential savings, which can be a bit misleading! You have to toggle the button for ‘Purchase Price’ to see what you’ll actually pay, given the point-of-sale tax credit won’t apply until 2024 at least.
I bought a 2023 Tesla Model 3 RWD with LFP batteries in November 2022. Based on my reading, the minerals in these LFP batteries comes from China. And the LFP batteries come from CATL, in China. While the car is assembled in Fremont, CA, I believe the batteries for these LFP batteries come from China. This is why I did not delay my purchase till 2023. Was I correct? Please comment.
I hate to break it to you, but you may have been better off waiting until 2023 to buy that Tesla.
In 2022, Teslas remained ineligible because they’d already met the sales cap.
However, come January 1st, 2023, the Model 3 should be eligible again for the tax credit, assuming it is priced under the new price caps (so, the Performance model wouldn’t qualify, for instance).
And, as of yesterday, the Treasury Department is delaying the rules on critical minerals until March at least. That means some Teslas and GM EVs will be eligible for a 3-month window Jan-Mar, 2023.
Sorry I don’t have better news for you!
If I purchased a 2022 model 3 long range will the credit be retroactive? Or would I have to purchade a 2023 model
As things stand, buying a Tesla Model 3 in 2022 won’t get you the tax credit. But once Jan 1st rolls around, the sales cap is lifted and Teslas should qualify again if the build is priced under the new price caps.
The Treasury Department just (yesterday!) issued a statement saying the critical minerals rules will not go into effect until March at least, meaning you’ve got a three month window (Jan to March) where a Tesla may be eligible for the tax credit. Best to talk to your dealer to be sure, though!
I bought a Tesla Model X 2022 model, long-range this October. Does that mean that I won’t be able to get any write-offs or federal tax credits? Cause during the purchase process, the salesmen were really demonstrating model X as a car that would help business owners with their tax deductions. Also, another quick question: if I cannot be eligible this year, can I still apply at the beginning of 2023 even though I purchased the car in 2022?
Sadly, it’s highly unlikely you’ll qualify for the tax credit on a Tesla bought in 2022, even after the IRA came into effect August 16. The sales cap was only lifted Jan 1st. If you bought it for a business, there may be some wiggle room. I’m less familiar with those rules, but it’s definitely worth asking your accountant to take a look.
Do you know what the tax credit could be in Jan to Mar 2023 if you lease instead of buy a Model 3 under the 55,000 limit? You used to get half if you leased.
Leasing is a tad confusing under the new IRA rules. From some FAQs issued by the IRS Feb 4, 2023:
Q7. What happens if the clean vehicle lease agreement is recharacterized as a sale for tax purposes? (added December 29,
A7. In the event the clean vehicle lease is recharacterized as a sale, the lessee would need to determine if they are eligible
to claim either a clean vehicle credit or a qualified commercial vehicle credit. The lessor would not be eligible to claim either
credit because they would have engaged in a resale of the vehicle.
To me, this suggests that if you lease a new EV but then later buy out the lease, thus turning the lease into a purchase, you would be able to claim the tax credit (assuming all other eligibility requirements are met). Presumably, the same would go for a leased used vehicle, assuming the same regarding additional requirements.
The FAQs document also states that a qualified vehicle is one that “Is acquired for use or lease by the taxpayer and not for resale”. It also notes that for tax purposes a lease may be characterized as a sale if the lease covers more than 80-90% of the useful life of the vehicle, or if the lease is structured in such a way that it’s essentially a ‘lease to own’ contract where vehicle ownership is set to transfer to the lessee from the lessor at the end of the contract (even with a buyout clause).
As always, best to talk to your accountant to figure this one out.
Hope that helps!
Thanks for this article. I’ve been wondering about this 2-3 month window, and that it may be a great chance to buy an LFP Model 3. I’m more interested in the Cybertruck, but the Model 3 resale value is so good that I wouldn’t lose much in depreciation should I decide to switch vehicles down the line.
I live in a cold climate, so LFP is a bit worse for charging, however, the LFP range should not drop much at all over time, and handles charging to 100% without degradation. If I can install a tow hitch, I think it could actually work as our only vehicle, for a while.
This seems crazy to me. Why not let everyone who bought an American made Tesla have the credit. Why make all these crazy conditions that make no sense. Oh wait it’s the U.S. Government, and our congress, that explains it all.