Buying an electric car? You can get a $7,500 tax credit, but it won't be easy
Uncle Sam wants you to buy an electric vehicle. And he's willing to throw $7,500 your way to make it happen ... if you and the model you want both qualify.
The tax credits for purchasing electric vehicles (EVs) got a major overhaul on Jan. 1. EV tax credits have been around for years, but they were redesigned as part of President Biden's massive climate bill signed into law last year. And in the process, they got complicated. Really complicated.
And to add to the confusion, a car that's eligible now might get zilch come March, when the rules may change again.
Here's what you need to know if you're considering shopping for an electric vehicle or a plug-in hybrid in 2023. It's a lot. (And this guide only covers the federal tax credit — state and local governments may offer other incentives.)
Not every electric vehicle qualifies for the credit
Which vehicles are eligible for the $7,500 federal tax credit has changed dramatically, compared to a previous version of the credit. Bestselling Chevy Bolts and Tesla Model 3s and Model Ys are eligible now; many other vehicles, like the expensive Lucid Air or the foreign-built Kia EV6, are not.
Plug-in hybrid vehicles continue to qualify for the credit, as well as fully electric vehicles, provided they meet a laundry list of restrictions.
So which cars are now eligible? There's a list on the IRS website but — big, big caveat — just because a vehicle is on the list doesn't mean it actually qualifies. Read on to learn more about the other limitations.
There are price caps for cars and SUVs
Only vehicles that cost less than $55,000, or less than $80,000 for trucks and SUVs, can get a tax credit.
That may sound generous, but electric vehicles are pricey. Jessica Caldwell, the executive director of insights at Edmunds, points out that most EVs sold today cost over 60 grand. "It's going to be hard to get a vehicle at these prices," she says.
The IRS just did make it a little easier for vehicles to qualify. As of Feb. 3, the IRS has reclassified many more vehicles as SUVs.
The latest change raises the price cap for most crossovers, or small SUVs, and treats them like larger SUVs and trucks.
Under the updated guidance, the vast majority of the eligible vehicles have an $80,000 price cap rather than a $55,000 price cap. Only the BMW 330e, Chevy Bolt, Chevy Bolt EUV, Nissan Leaf, Tesla Model 3 and Volvo S60 are now classified as cars.
The IRS says the new classifications will be applied retroactively to Jan. 1, meaning some people who thought their vehicle cost too much to qualify may now be getting a tax credit after all.
General Motors had been lobbying for this change; the Cadillac Lyriq, formerly classified as a car, was too expensive to qualify for the credit, but it now qualifies as an SUV.
The standard Tesla Model Y was also too expensive to qualify ... until Tesla slashed its prices last month. The move made Model Ys eligible for tax credits. Now they would be eligible even at the original, higher price.
Check the IRS website to confirm the relevant price cap
This is not the first time the IRS has changed the price caps for a vehicle, and the guidance around these tax credits may well change again, so always check the IRS website for the most up-to-date information.
Once you've confirmed the correct price cap, check the manufacturer's website or an individual vehicle's window sticker to confirm if the MSRP is under that price. Just because a vehicle is on the IRS website does not mean it qualifies; if it's on the list but the MSRP is over the stated cap, you cannot get the tax credit. And for the record, it doesn't matter if a dealer actually charges you more or less, because the price cap is based on the MSRP.
Vehicles have to be made in North America
This means some vehicles, like the Kia EV6 and Hyundai Ioniq, are simply not eligible for a purchase credit right now. (But you might be able to lease them! Read on for more.)
Others, like the Volkswagen ID.4, require some detective work. Some ID.4s were made in Germany and don't qualify for a credit. But if you're looking at one built in Chattanooga, Tenn., it qualifies.
You can use an individual vehicle's VIN to look up whether it was made in America. And yes. That's a bit of a hassle.
A bunch of cars will stop qualifying in March (probably)
Last summer's big climate law limited the tax credit by adding strict sourcing requirements for the battery components. Because battery supply chains have historically been concentrated in Asia, carmakers will likely struggle to meet those requirements.
And for now ... they don't have to. Until the IRS figures out the rules for meeting those requirements, which will be March at the earliest, the Treasury Department says the restrictions simply don't apply.
Sen. Joe Manchin, D-W.Va., who added the requirements in order to boost American manufacturing, is very upset about this — but for car buyers, there's a window of opportunity. Cars that qualify for $7,500 right now may only get $3,250, or no credit at all, come March.
And the IRS is clear: When it comes to the timing of a purchase, it doesn't matter when you pay for a vehicle, it matters when you have the vehicle in your possession.
Should you run out and try to get a vehicle immediately? Maybe!
"I would say if there was an EV that you're interested in, that today qualifies for a full $7,500 tax credit and you know that it qualifies and you know that it's available on a dealer lot — you should go and buy it," says Keith Barry of Consumer Reports.
The bit about the dealer lot is important. Wait times for electric vehicles have been incredibly long, so if you order a vehicle, eligibility rules may change before it arrives at your dealership.
Also, Barry says, you may need to be flexible on things like color and features if you want to get a vehicle by March. But don't budge on the big stuff, like the model of car you want.
"Don't go out there and and buy an unreliable EV just because it'll qualify for this tax credit," he advises.
You can't make too much money (or too little)
The new climate law also added income limits for the tax credit: a maximum of $300,000 for a household, $150,000 for an individual or $225,000 for a head of household. That's a big chunk of change, but because electric vehicles are so expensive, it will disqualify a fair number of buyers.
Note that income limit is adjusted gross income, or AGI, not your total income. Contributions to a retirement account, among other things, reduce a taxpayer's AGI. Also, if you are over the cap in 2023 but were under the cap in 2022 you are still eligible. If any part of this paragraph seems relevant to your life, you'll probably want to talk to a tax advisor about your eligibility.
On the other end of the income spectrum, for the next year, you have to owe at least $7,500 in taxes to get the full benefit of the credit. That's because the credit is applied against your tax bill (for vehicles purchased in 2023, you'll get the credit when you file in 2024) — and you don't get a refund if your tax credit is bigger than your total tax liability.
A lot of people pay less than $7,500 in income taxes. Tens of millions of people, including many who earn more than the median income.
It'll be easier to get the credit in 2024, with a big but
The government knows that nobody really wants to have to calculate their taxes a year in advance in order to figure out if they get a discount on a car or not.
And starting in 2024 you won't have to. The credit will be available as a "point-of-sale rebate," which means a car dealership would knock $7,500 off the price of the vehicle and then handle everything with the IRS. That will make it faster and just plain easier to get the credit, without having to wait for a year.
It also means you will be able to receive the discount even if you owe less than $7,500 in taxes that year. (The other restrictions will still apply.)
The downside? By 2024, those stricter battery requirements may well be in place, which means no one knows for sure which vehicles will qualify for the full tax credit. We can guess — GM and Tesla may have the best shot at it — but it's just a guess.
You might be able to get the credit by leasing a car, with far fewer restrictions
If you want to lease a vehicle, you can forget everything you just read.
In late December, the IRS clarified that vehicles that are leased to consumers can be eligible for a version of the tax credit that is much, much easier to qualify for. It has no requirement that vehicles be made in America, no price cap for vehicles, and no income caps. So if you want to lease a Kia EV6 from Korea, or a six-figure luxury sedan? Go to town.
The credit goes to the company leasing the vehicle out — not the person driving it — and companies aren't required to pass the savings on to consumers. But the tax credit has worked like this for years now, and companies typically have passed along the discount.
Of course, with a lease you have caps on mileage per year, and you're not paying off a vehicle that you'll eventually own free and clear. If you plan to upgrade to a newer vehicle anyway you may not mind, but be sure to consider if a lease meets your needs. Make sure the discount is actually passed along to you, and read your entire contract carefully.
For the first time, there is a credit for buying a used EV
Do the prices for new electric vehicles make you feel faint? If you buy a used electric vehicle — model year 2021 or earlier —you can get up to $4,000 back as a tax credit.
This tax credit has an income cap too: $150,000 for a household, $75,000 for a single person. Again, that's adjusted gross income, meaning an individual's salary may be higher than that and they could still qualify.
And there is a price cap: vehicles must cost less than $25,000. You also have to buy the vehicle from a dealership, not from an individual.
The biggest problem may be finding a vehicle that qualifies. Used Teslas are worth more than that, and there just aren't very many other used EVs on the market right now.
You can get a very hefty credit for a business vehicle
If you run a business, you may be interested in the commercial tax credit for EVs, which provides up to $7,500 for a light vehicle and up to $40,000 for a larger vehicle, like a delivery truck.
If your company could use a sedan, you may be in luck. But larger vehicles can be tough to find right now, says Hari Nayar, the VP of Fleet Electrification & Sustainability at Merchants Fleet. You want an electric pickup? Get in line.
"If somebody wants to get a pickup truck," he says, "the vehicles are not available. Even the vehicles that are available may not have the capability in terms of range or charging infrastructure."
Companies that make deliveries and could use an electric box truck, like the Ford E-transit, may be in the best position to take advantage of the credit for now, he says.
The rules might change again
Congratulations! You have now passed EV Tax Credit 101. To continue your studies, you can check out the FAQs on the IRS web site.
However ... as mentioned, the IRS still needs to issue guidance on the sourcing requirements for battery components by March, which has the potential to yet again change which vehicles qualify.
There could be a big fight about this. Manchin still wants stricter made-in-the USA requirements while many automakers want requirements loosened.
And it's not just government policies that might shift. Tesla has slashed its vehicle prices dramatically, bringing the base price for the Model Y under $55,000 and putting pressure on other automakers to change their pricing as well, which is having ripple effects across the new and used auto market.
So after all the time you invested in learning about the tax credit, everything could change again, and we'll all have to start over again with the basics.