Why the $7,500 EV tax credit may be tougher to get starting in March

Getting a $7,500 tax break for the purchase of a new electric vehicle will likely get harder in a few months — meaning prospective buyers who want the financial incentive may wish to speed up their timeline.  

The Inflation Reduction Act, a historic climate law President Biden signed in August, tweaked rules for an existing tax credit associated with the purchase of “clean” vehicles.

The law, which extended the tax break through 2031, changed some requirements to get the full $7,500 value of the “clean vehicle credit.”

Some tax and auto experts think the tweaks — largely intended to bring more manufacturing and supply chains within U.S. borders and those of allies — will temporarily make it more difficult to qualify for all or part of the credit.

Some of the tax credit rules took effect on Jan. 1. (More on those, below.) But others pertaining to battery minerals and components — arguably the more challenging to meet — don’t take effect until the IRS issues guidance. The agency expects to do that in March 2023.

At that time, many clean vehicles that currently qualify for the tax break may not anymore — at least, until manufacturers are able to satisfy the new rules.

Consumers who are in the market for a new electric car, truck or SUV likely have a limited time within which they can more easily claim the tax break, experts said.

“There’s almost like a three-month grace period,” Lesley Jantarasami, managing director of the energy program at the Bipartisan Policy Center, said.

Manufacturers have identified 27 all-electric and 12 plug-in hybrid car and truck models that qualify for the tax break based on existing rules, according to IRS data as of Jan. 17. (Buyers must also meet criteria like income requirements.)

Tesla cut prices on some car models this month, helping them qualify for a tax break. There will likely be additions to the vehicle list in coming days and weeks, the IRS said.

After IRS guidance comes through, Jantarasami said, “I don’t think there’s any doubt the list of eligible car models will shrink in the short term.”

If that happens, though, consumers can instead get a separate tax break for buying a used electric car instead of a new one, or perhaps by leasing a car, experts said.

The clean vehicle credit is a “nonrefundable” tax credit. That essentially means buyers only get the full benefit if they have an annual federal tax liability of at least $7,500.

Buyers can qualify if the new plug-in electric or fuel-cell vehicle is “placed in service” after Dec. 31, 2022. A car is placed in service when the taxpayer “takes possession” of it, the IRS said; that may differ from the purchase date.

Some rules have already kicked in that limit the qualifying buyers and vehicles:

• Income: Married couples don’t qualify for the new-vehicle credit if their modified adjusted gross income on a joint tax return exceeds $300,000. The limit is $150,000 for single tax filers and $225,000 for heads of household. Buyers can use the lesser of their income in the year they take delivery of the car or the prior year.

• Vehicle price: The credit is unavailable if a manufacturer’s suggested retail price exceeds $80,000 for vans, sport utility vehicles and pickup trucks or $55,000 for other vehicles. Note: MSRP isn’t necessarily the price you pay for the car.

• Manufacturing: The vehicle must have undergone final assembly in North America. Buyers who have a car’s Vehicle Identification Number (VIN) can consult a U.S. Department of Energy website to learn if it qualifies.

The aforementioned list of qualifying cars cited by the IRS are based on these criteria.

Coming IRS guidance — again, expected in March — adds two requirements for car batteries.

The pending rules will tie the $7,500 credit amount to whether a new clean vehicle’s battery meets a critical mineral and a battery component requirement.

• Critical minerals: Broadly, the rule requires a certain share of the battery’s critical minerals be “extracted or processed in the United States, or in any country with which [it] has a free trade agreement in effect, or recycled in North America,” according to a Treasury Department document. That share rises over time: 40% or more in 2023; 50% in 2024; 60% in 2025; 70% in 2026; and 80% thereafter.

• Battery components: At least half of the vehicle’s battery components (like battery cells and modules) must be manufactured or assembled in North America starting in 2023. That share increases to 60% in 2024 and 2025, and grows gradually to 100% in 2029.

Cars that meet one of these requirements get half the credit ($3,750). Cars that meet both get the full value.

It’s likely that few, if any, new clean vehicles will be eligible for the full $7,500 when these two requirements take effect.

“We’re encouraging consumers interested in buying and in a place to buy right now to jump on it,” said Ingrid Malmgren, policy director at Plug In America, a nonprofit advocacy group for clean vehicles. “Because we don’t know what’s going to happen in March.”

Until March, the credit’s full value is tied instead to a calculation for battery capacity.

Vehicle specs like battery capacity, final assembly location and VIN are listed on the window sticker, the IRS said.

However, there are other options available for buyers if the current list of eligible vehicles is shortened come March.

Households can buy a used clean vehicle and may get a tax break worth up to $4,000, experts said. That tax break, which became available Jan. 1, comes with some requirements for car and buyer but are generally less stringent than the ones for new vehicles, experts said.

Additionally, it’s possible dealers leasing clean cars can pass on some tax savings to consumers. In this case, a dealer claiming a tax credit for commercial clean vehicles might pass on some of its $7,500 tax break in a lease agreement or as a break on the down payment, for example, Malmgren said. This commercial credit isn’t subject to income, battery, assembly or MSRP requirements, she said.

However, consumers should ask dealers before leasing, she added, since it’s not a given such entities would qualify for a tax break or pass on money to consumers in a lease.