MORE SUVS, TESLAS NOW QUALIFY FOR THE NEW ELECTRIC VEHICLE TAX CREDIT

Additional rules about which vehicles are eligible are coming in March, so act fast if there’s a car you want to buy

By Keith Barry

After price drops from Ford and Tesla and a rules change from the Treasury department, more new electric cars now qualify for a tax credit of up to $7,500. But in order to claim those savings, you’ll have to pay close attention to a set of complex and changing rules. You might need to act fast, and you might want to consider leasing instead of buying.

Earlier today, the Treasury Department announced that buyers would be able to tell if a vehicle qualifies as a station wagon or SUV based on information that’s already on its window sticker. In practice, that means more trim levels of the Mustang Mach-E and Tesla Model Y will qualify for a tax credit retroactive to Jan. 1, 2023.

Tesla recently dropped the price on many of its vehicles including the five-passenger Model Y, which now joins a growing list of vehicles that should qualify for the tax credit. Some prices are coming down regardless of incentives, such as new discounts on the Ford Mustang Mach-E. Cadillac recently announced a lower-cost entry level Lyriq, as well.

The list of eligible vehicles continues to grow—and those who choose to lease instead of buy may be eligible to claim a credit on vehicles that aren’t on the list. Consumer Reports will continue to update this article as we learn more information.

But starting in March, new rules could reduce the credit amount that buyers of some vehicles may be eligible for. They must take possession of the car before those rules are issued, a White House spokesperson told Consumer Reports. It’s not enough to simply purchase the car before then.

The changes are due to the Inflation Reduction Act of 2022—designed to address climate change, healthcare, and taxes—which includes revised tax credits of up to $7,500 on certain new EVs (see the list of 2022 and 2023 models that qualify) and a new tax credit of up to $4,000 on used electric cars. Some new rules, such as the requirement that new EVs be made in North America to qualify for a tax credit, went into effect as soon as President Joe Biden signed the law in August. Others went into effect on Jan. 1, 2023, although leasing could offer a way around these conditions.

A Treasury Department spokesperson told CR that most traditional leases would qualify for a $7,500 commercial credit not subject to the myriad requirements that must be met to qualify for the consumer new vehicle credit. Among those are requirements that buyers meet income restrictions, the vehicle is priced below a certain amount, and it’s made in North America. In the case of a lease, the dealer would receive the commercial credit, not the person leasing the vehicle, and it would be up to the dealer to pass those savings on to the consumer. If a dealer does pass the savings along, drivers could get a tax credit on a car made outside North America, such as the popular Hyundai Ioniq 5.

High-income consumers and those who lease a high-cost EV such as a Lucid Air or Tesla Model S or X would also be able to get the $7,500 credit as long as the dealer passed those savings along. 

“If the vehicle you’re looking at buying qualifies for a tax credit today, there’s no reason to wait, because it may no longer qualify for a full credit in March,” says Chris Harto, CR’s senior policy analyst for transportation and energy. “If it doesn’t qualify, it may make sense to talk to your dealer about leasing options.”

Still being decided are proposed rules about critical minerals and battery components, which will determine how much of a tax credit a vehicle can get. The Treasury Department said it would issue initial proposals regarding these requirements in March. Until then, new vehicles won’t have to meet those requirements to qualify for the full $7,500 tax credit.

Although the list of vehicles issued by the IRS brings some clarity, automakers and EV advocates have told Consumer Reports they’re concerned that uncertainty around leasing, battery, and critical mineral requirements may make it difficult for consumers to find a vehicle that qualifies for the credits or understand how much they’ll be eligible to claim.

Among other provisions, the act:

• Offers a tax credit of up to $7,500 on new EVs and plug-in hybrid vehicles (PHEVs) depending on their battery capacity.

• Offers a new tax credit of up to $4,000 on used EVs put into service after Dec. 31, 2022.

• Takes away the 200,000 vehicle cap on tax credits that made EVs and plug-in hybrids from Tesla, GM, and Toyota ineligible under prior rules. Previously, once an automaker sold more than 200,000 qualifying vehicles, the credit began to phase out.

• Does away with existing tax credits for pricey EVs, such as the Hummer EV, Lucid Air, and Tesla Model S and Model X. (This requirement may not apply to some leased vehicles.)

• Eliminates tax credits for vehicles not assembled in North America, including the BMW i4, Hyundai Ioniq 5, Kia EV6, and Toyota bZ4X. (This requirement also may not apply to some leased vehicles.)

• Starting in 2024, it adds the ability for qualified dealerships to offer the tax credit directly to buyers at the point of sale, so buyers won’t have to claim the credit on their taxes. Until that provision goes into effect, buyers who don’t have a tax liability may be able to benefit from the tax credit on a lease.

Once the Treasury Department issues its proposed rules in March, the bill will also limit the amount of tax credit buyers of new EVs can get depending on whether the car’s battery minerals are recycled in North America, from the U.S, or from countries that the U.S. has a free-trade agreement with, and if battery components are from North America. This rule is currently not in effect.

Which Car Purchases Might Qualify for the New EV Tax Credit?

Only EVs and PHEVs with a final assembly point in North America will qualify for the consumer tax incentive. In addition, there are caps on how much vehicles can cost. For SUVs, pickup trucks, and vans, the threshold is $80,000. For sedans, hatchbacks, wagons, and other vehicles, the credit cuts off at $55,000. These limits are based on a vehicle’s manufacturer’s suggested retail price (MSRP), not on its sale price, so a heavily discounted luxury car would not qualify. In addition, a vehicle’s destination fee wouldn’t count towards the cap.

Whether a vehicle counts as an SUV or a wagon could be confusing for some buyers. That’s because advertising terms don’t always fit neatly with the definitions the Treasury Department is using. These are now the same as definitions used by the Environmental Protection Agency’s fuel economy labeling standards, which are listed on a vehicle’s window sticker. For example, the Ford Mustang Mach-E and Escape PHEV are now listed as small SUVs, along with every trim level of the Tesla Model Y and Volkswagen ID.4. However, the Chevrolet Bolt EUV, Kia EV6, and Nissan Ariya are listed as small station wagons, and the Hyundai Ioniq 5 is classified as a large car. Although this change was made on Feb. 3, 2023, the credits are retroactive for vehicles purchased after Jan. 3, 2023.

The IRS says the manufacturers of the following EVs and PHEVs indicated that they are currently eligible for a tax credit between $3,751 and $7,500 depending on the battery size, provided other requirements are met, such as buyer income and MSRP.

  • Audi Q5 TFSI e Quattro PHEV SUV (MSRP $80,000 or below)
  • BMW 330e sedan (MSRP $55,000 or below)
  • BMW X5 xDrive45e SUV (MSRP $80,000 or below)
  • Cadillac Lyriq (classified as a car by the IRS, so its MSRP must be $55,000 or below. The Lyriq is on the IRS list even though it has a starting MSRP of $62,990 and therefore would not qualify unless Cadillac lowers its MSRP.)
  • Chevrolet Bolt hatchback (MSRP $55,000 or below)
  • Chevrolet Bolt EUV hatchback (MSRP $55,000 or below
  • Chrysler Pacifica PHEV minivan (MSRP $80,000 or below)
  • Ford Escape PHEV SUV (MSRP $55,000 or below)
  • Ford E-Transit van (MSRP $80,000 or below)
  • Ford F-150 Lightning pickup truck (MSRP $80,000 or below)
  • Ford Mustang Mach-E SUV (classified as a car by the IRS, so its MSRP must be $55,000 or below)
  • Jeep Wrangler 4xe PHEV SUV (MSRP $80,000 or below)
  • Jeep Grand Cherokee 4xe PHEV SUV (MSRP $80,000 or below)
  • Lincoln Aviator Grand Touring PHEV SUV (MSRP $80,000 or below)
  • Lincoln Corsair Grand Touring PHEV SUV (classified as a car by the IRS, so its MSRP must be $55,000 or below)
  • Nissan Leaf S, S Plus, SL Plus, SV, and SV Plus hatchbacks (MSRP $55,000 or below)
  • Rivian R1S SUV (MSRP $80,000 or below)
  • Rivian R1T pickup truck (MSRP $80,000 or below)
  • Tesla Model 3 Rear-Wheel Drive and Long Range sedans (MSRP $55,000 or below)
  • Tesla Model Y All-Wheel Drive, Long Range, and Performance SUVs (MSRP $80,000 or below for seven-passenger versions, or MSRP $55,000 or below for five-passenger versions)
  • Volkswagen ID.4, Pro, Pro S, S, AWD Pro, and AWD Pro S SUVs (only models made in Tennessee with an MSRP $55,000 or below for front-wheel-drive versions or MSRP $80,000 or below for all-wheel-drive versions)
  • Volvo S60 PHEV, Extended Range, and T8 Recharge sedans (MSRP $55,000 or below)

The IRS says that General Motors, Hyundai, Jaguar Land Rover, Kia, Mazda, Mercedes-Benz, Mitsubishi, Polestar, Porsche, Toyota, and Subaru have indicated that they plan to submit vehicles to the list but have not yet done so. Many of these vehicles may also qualify for state and local incentives. You can find out more at CR’s EV incentive finder. No vehicles were removed from the list due to the recent reclassification of vehicle types.

Some of the vehicles on the IRS list may not meet the battery and critical mineral requirements that are likely coming in March. And starting in 2024, if any minerals or components are from “foreign entities of concern,” including China or Russia, the vehicle will not qualify for a tax credit. An analysis this year of the EV supply chain from the International Energy Agency shows that a vast majority of minerals, components, and battery cells are currently from China. This restriction won’t apply to used vehicles and may not apply to leased vehicles.

Until March, some PHEVs may only qualify for a partial tax credit. That’s because they’re currently subject to a previous set of rules, which limited the tax credit value based on battery size for batteries below 17 kWh.

“Once the IRS guidance is issued, the new rules will go fully into place, and all PHEVs with a battery of at least 7 kWh will qualify for the full tax credit value as long as they meet all of the other requirements,” Harto says.

Despite the confusion, the bill is a major achievement overall, says Quinta Warren, associate director of sustainability policy at Consumer Reports.

“This bill has enormous potential to be a game changer for consumers and clean transportation,” she says. “Our research shows that a growing number of consumers are interested in getting electric vehicles, but many have questions about costs and charging, and this bill would help lower some of those barriers.”

A CR survey found that more than half of car buyers would be more likely to purchase an EV if a tax credit brought down the price. Harto says that the provisions set forth in the bill might slow EV sales in the short term but that it’s a “massively positive” benefit for EV adoption as a whole.

“Over the longer term automakers will adjust, bring their EV and battery manufacturing supply chains to North America, and ensure that American tax dollars are going to support American jobs,” he says. “Even though some vehicles that currently qualify will become ineligible, those tax credits were going to run out eventually—and likely pretty quickly for most popular vehicles—so the benefit would have been short-lived.”

Ultimately, the new rules will transition EV manufacturing away from China and toward North America, Brett Smith, technology director at the Center for Automotive Research, told CR when the IRA was first signed. But that shift could take time. 

Manufacturers are already making major investments in building batteries in the U.S., but supplying those factories with raw materials from North America could remain a problem, especially considering China’s dominance in mining. “Generally, it’s going to be tough to create the processing here and really tough to create the mining here,” he says.

Which Cars May Qualify for the New EV Tax Credit Only If Leased?

These current and coming EVs (and two fuel-cell vehicles) aren’t made in North America and therefore aren’t likely to qualify for a tax credit if they’re purchased, although that might change if their assembly location changes. In addition, dealers may pass a tax credit on to consumers if the vehicle is leased instead of purchased.

In addition, regardless of where they’re assembled, these vehicles have MSRPs that are too high and will not qualify for any tax credit if they’re purchased, although dealers may pass a tax credit on to consumers if the vehicle is leased:

Inflation Reduction Act EV Tax Credits in Detail 

• New electric and fuel-cell vehicles will get a tax credit of up to $7,500. Some plug-in hybrid vehicles will also continue to qualify.

• Only vehicles that cost below a certain amount will qualify. For SUVs, pickup trucks, and vans, the threshold is $80,000. For sedans, hatchbacks, wagons, and other vehicles, the credit cuts off at $55,000. (Read more about lower-priced EVs.) This provision may not apply if a vehicle is leased.

• There will be no limit on the number of vehicles an automaker can sell that are eligible for the credit. 

• Unlike in prior years, the exact amount of the new tax credit will depend on a complex set of calculations based on where the vehicles are assembled and where the materials that make up their batteries are from. Once these requirements go into effect in March, they get stricter each year through 2026. This provision may not apply if a vehicle is leased.

• Only vehicles assembled in North America will be eligible for a tax credit. This provision may not apply if a vehicle is leased.

• The exclusion of vehicles with components from “foreign entities of concern,” including Russia and China, will go into effect on Dec. 31, 2023. This provision may not apply if a vehicle is leased.

• Starting in 2024, dealerships will be able to offer the value of a tax credit upfront to consumers. This may simplify the process for car buyers.

• Car buyers must meet certain income guidelines. Households with an adjusted gross income up to $300,000 will still qualify for the credit, while heads of household must earn below $225,000 and individual filers will qualify only with income below $150,000. This provision may not apply if a vehicle is leased.

• For the first time, buyers of used EVs will get a tax credit, either $4,000 or 30 percent of the sale price of the vehicle—whichever is lower. But that’s only if they buy a car from a dealership, and only if the vehicle wasn’t previously resold after Aug. 16, 2022.

• The income threshold is lower for used-EV buyers: $150,000 for joint filers, $112,500 for a head of household, and $75,000 for an individual.

• Bidirectional EV chargers—ones that can also power your house using the energy stored in your car’s battery—are now eligible for tax incentives.

The Growing Interest in EVs

Interest in electric vehicles is predicted to surge next year because of expanded tax credits through the federal Inflation Reduction Act. EV popularity also should see a boost because California, the largest domestic car market, is expected to ban sales of new gas-powered passenger vehicles by 2035, essentially requiring them to be electric.

The new zero-emissions standard, called Advanced Clean Cars II, will scale down emissions permitted from new cars, SUVs, and passenger trucks starting in 2026. The plan relies on advanced vehicle technologies, including battery-electric, hydrogen fuel-cell electric, and plug-in hybrid electric vehicles, to meet air quality and climate change emissions goals. The California Air Resources Board (CARB) is expected to approve the new rule on Thursday.

The two major public policy developments—from Washington, D.C., and Sacramento, Calif.—should be a boon for EVs, which have languished for years in the low single-digit percent range of annual new-car sales.

The California effect might take a few years to show up in the market, but in the short term, some new and used electric cars will become more affordable for consumers because of the latest federal tax credit changes.

Consumer Reports is an independent, nonprofit organization that works side by side with consumers to create a fairer, safer, and healthier world. CR does not endorse products or services, and does not accept advertising. Copyright © 2023, Consumer Reports, Inc.

2022-08-08T20:44:17Z dg43tfdfdgfd