Americans are flocking to electric vehicles, which has increased sales by 127% in the past two years. To sweeten the deal, the federal government is offering a tax credit of up to $7,500 for electric vehicles and other “clean vehicles,” including plug-in hybrids.
But buckle up if you want to qualify. You will have to navigate a tangle of eligibility rules. Dealers are not likely to sell below sticker price. And you may need to shop before additional Internal Revenue Service rules are expected in March, cutting or eliminating credits for some models.
“If you want an EV, now is the time to do it,” says Ingrid Malmgren, policy director for Plug In America, an EV advocacy group.
The credit rules, revised under the Inflation Reduction Act, are a mix of good and bad news for buyers. One positive change is that the models of
general motors
(ticker: GM) and
tesla
(TSLA) now qualify. The government no longer has an eligibility limit of 200,000 EV sales, a provision that restored credits for GM and Tesla.
Tax breaks are also available for plug-in hybrids like the Audi Q5 PHEV and BMW 330e. And, for the first time, you can get a used car credit.
But a big hurdle is a new requirement for a car to have final assembly in North America. While leasing may be one way around it, the rule change disqualified sales of a large number of EVs and add-ons, including cars made by Toyota, Hyundai, Kia and Subaru.
Ultra-luxury vehicles are off limits. Sport utility vehicles, vans and vans are eligible only if the sticker price is less than $80,000. For automobiles, the limit is $55,000.
Tesla, for its part, has already responded, cutting prices on some models to revive sales to just below thresholds. The Model Y is adjusted to $52,990 from $65,990, and the Model 3 Performance is now $53,990, down from $62,990.
To check if a car meets assembly requirements, you can enter its vehicle identification number on a Department of Energy site. The IRS also lists vehicles that meet its criteria.
Anyone buying or leasing will have to meet income thresholds. For new vehicles, modified adjusted gross income cannot exceed $300,000 for couples filing jointly. The threshold is $225,000 for heads of household and $150,000 for singles and all other taxpayers. For used vehicles, the income thresholds are half the amounts for new vehicles in each category.
Buyers are facing a time crunch. The government plans to impose battery sourcing requirements on electric vehicles to qualify for tax credits. For 2023 models, 40% of critical battery minerals and 50% of battery parts must come from North America or countries with a free trade agreement with the US. Mineral and component requirements increase by 10 percentage points each year. If a car meets only one threshold, for minerals or components, the buyer would qualify for half the credit, or $3,750.
The battery rules will take effect after the IRS issues guidance, which is expected in March. Once effective, the thresholds could disqualify most EVs from full credit, says Chris Harto, senior policy analyst at Consumer Reports. “Most vehicles will qualify for the battery component credit, but most, and perhaps all, will not qualify for the minerals part,” he says.
tesla,
ford engine
(F), and GM have said their models will likely meet the threshold for parts but not for critical minerals, meaning the credit could be reduced to $3,750 for their models.
One big winner, for now, is Tesla. The leading maker of electric vehicles has eight model variations, more than any other manufacturer, that qualify for the $7,500 credit, including its Model Y All-Wheel-Drive and Model 3 Long Range. But come spring, the credits on those cars will likely be cut in half.
Another factor: You need to take possession of the car before the IRS issues rules related to the battery. A down payment and a signed sales agreement are not enough to seal the tax benefit.
Hagglers are likely to face stiff resistance from dealers. Electric vehicle inventory was already tight due to supply shortages left behind by the pandemic. Dealers may see a surge in demand as buyers try to get the full tax break before March, giving them little incentive to compromise. Many electric vehicles sell for sticker price or more. That can increase upfront costs and total cost of ownership.
“The vehicles that will get ahead in the economy are the ones that haven’t been priced up much by dealers and still qualify for the credit, like the Nissan Leaf and the Chevy Bolt,” Harto says. “The Bolt is a scream buy,” he notes, referring to GM’s best-selling electric vehicle, with a starting price of $26,500.
Another way to get a tax credit is with a used car. The value of the credit can be equal to 30% of the sale price and is capped at $4,000. However, used models must be purchased through a dealer for no more than $25,000.
One potential way to get around some eligibility rules is to lease. Commercial car buyers, just like dealers, are not subject to the myriad of consumer regulations. When dealer finance companies purchase electric vehicles to lease from customers, they can get the full $7,500 credit and pass the savings on. “Consumers can capture credit when negotiating a lease,” says Malmgren. “This has the potential to be a significant loophole.”
However, dealers may not dish out all the savings, given strong demand for electric vehicles. Lease terms and prices also incorporate interest rates and other costs that could make a purchase more economical during the years of ownership.
Whether any of these cars will save you money depends on the price of gas and the competitive cost of electricity. Given the higher prices of EVs, plus repair and maintenance costs, it typically takes six years of ownership to make it more profitable than a conventional model, Harto says. While tax credits can help, the window to capture the full benefit can close quickly.
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