What Does the EV Tax Credit Overhaul Mean for Car Shoppers?

Editor’s note: This story was updated on Oct. 11, 2023, to reflect new information on receiving the tax credit at the dealership.

The initial effect of the electric vehicle tax credit overhaul passed in the summer of 2022 and in progress of phasing in now has been confusion for EV shoppers (and sellers). That’s because the new law is trying to walk and chew gum, but it still aims, as before, to get more people to buy EVs and plug-in hybrids. The new law took what had been a mostly straightforward taxpayer subsidy — buy a new EV or PHEV, get a tax credit — and attached a bundle of new strings that determine whether the vehicle (which must have a battery capacity of at least 7 kilowatt-hours) qualifies for the federal tax credit of up to $7,500. It also adds strings on whether the buyer qualifies by setting income limits for the credit.

On the plus side, the law also introduces a new credit of up to $4,000 for used EVs — with its own vehicle and income rules. And starting in 2024, buyers will be allowed to get the credit immediately at the dealer when buying a vehicle rather than waiting to file taxes.

Related: Which Electric Cars Are Still Eligible for the $7,500 Federal Tax Credit?

New Tax Credit Plan Adds New Goals

The revised plan for the $7,500 federal EV credit also has broader goals that have added complications. One goal is to encourage more middle-class shoppers to take the all-electric leap by setting income limits. It also aims to spur development of lower-cost EVs by setting price limits. But the restrictions are generous enough that relatively well-off people still can get help to buy relatively expensive EVs.

The program is designed to benefit Americans overall whether they’re in the market for an EV or not. It aims to promote production of EVs in North America. It also encourages automakers to manufacture EV batteries in North America, as well as source key battery materials here or from friendly countries with which the U.S. has free-trade deals; sourcing from certain countries “of concern,” such as China, will be excluded altogether by 2025.

On April 17, the IRS, which administers the EV tax credit, released an updated list of qualifying vehicles that meet the revised battery production and materials sourcing requirements: For vehicles placed into service on or after April 18, the credit is split in two, with half of the $7,500 awarded for qualifying battery production and half for qualifying materials sourcing. In both cases, the percentage of content required for the credit will rise over the 10 years of the program.

It’s worth noting that these rules still could change based on ongoing discussions with trade partners that have objected to the new plan as a form of trade protection. We do not have a free-trade deal with the European Union, for example, but the EU is campaigning for its battery production still to count.

Why It All Matters

How well this program works — and how many vehicles can qualify for the full credit under new rules — is important because the subsidies have had a significant effect on buyer acceptance.  Federal subsidies have helped spur sales of typically more expensive electrified vehicles, first with a credit of up to $3,400 for hybrids from 2005 to 2010, and since then the credit of up to $7,500 for EVs and PHEVs. New-EV registrations were 7.1% of the U.S. light-vehicle market in January, up from 4.3% a year earlier, according to auto data tracker Experian.

Beyond Lofty Goals, How It’s Shaking Out for Shoppers

The current confusion over what vehicles will or will not qualify for the full EV tax credit might continue for a while. Shoppers should expect the qualification criteria to be a moving target thanks to the built-in escalating battery requirements and ongoing trade negotiations. But a few things about the EV tax credit seem clear for now:

Vehicles Must Be Made in North America

Automakers are scrambling to qualify more EVs by shifting production to their North American plants or building new plants, such as one recently announced by Kia. With the new battery requirements, they are also making an effort to adjust battery sourcing and production plans so more vehicles will qualify.

Buyer Income Limits Are Set

To get the tax credit for a new EV or PHEV, your household income is limited to a maximum of $300,000 for joint filers, $225,000 for heads of households and $150,000 for individuals.

Vehicle Price Limits Are Set

To qualify for the credit, the maximum price of the vehicle is capped at $55,000 for cars, wagons and hatchbacks and $80,000 for pickups, vans and SUVs. The government recently revised how it will classify vehicles in a way that has made more models count as SUVs for the higher price cap. The IRS has posted a list of currently qualifying vehicles and their price caps here.

A New Credit for Buying a Used EV Is Added

Used EVs bought from a dealer are eligible for a tax credit for the first time, which is aimed to help shoppers on a tighter budget. The credit is up to $4,000 or 30% of the sale price, whichever is lower. The vehicle’s sale price must be no higher than $25,000, it must be at least two model years old, and the buyer’s household income is limited to $150,000 for a joint return, $112,000 for heads of household and $75,000 for individuals. See used EVs for sale in our inventory.

It Gives You Your Money Upfront — Next Year

Starting Jan. 1, 2024, you’ll be able to get the EV tax credit at the dealer when you buy a new or used car and no longer will have to wait until you file your taxes. For the 2023 tax year, however, you’ll still have to wait until you file to get your credit. Note that if you take the credit upfront but end up with an income higher than the new or used income limits for 2024, you’ll have to pay the money back to the IRS.

It Allows a Backdoor Credit for Leasing a Foreign-Made EV

In a concession to foreign automakers producing EVs outside North America, the Biden administration ruled that leased EVs could qualify for a separate program that provides a $7,500 “commercial credit” for light-duty vehicles acquired by businesses — in this case, the leasing company. The benefit then could be passed to the lease customer in the form of a lower payment.

State and Local Subsidies Still Apply

The new federal rules do not affect various state and local subsidies that are available to EV buyers, and many of them have far fewer restrictions than the new federal program.

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