How to Navigate the Fed’s New EV Tax Credit Nightmare

There are several reasons why more buyers than ever have been in the market for an electric car. Some are concerned about reducing emissions and saving the planet; others are in it for the blatant eco-virtue signaling that the ownership of an EV can offer. For many, though, it's primarily about how an electric car can save them money on gas over the long run. But for now at least, EVs are on the expensive side, and the promise of government tax breaks can make those prices easier to swallow. The problem is, the new federal EV tax credit rules have suddenly become complex, confusing, and contentious, making shopping for an electric car and saving some of the money you pay Uncle Sam overly complicated. In an effort to help you cut through the government nonsense, we've unraveled the latest in the Internal Revenue Service's still evolving EV tax credit nightmare in the hopes that we can help you get a fat federal tax break.

In 2009, the U.S. government began providing a maximum $7,500 federal tax credit for buying a new EV. It came with a bit of red tape wrapped around battery-capacity requirements, a phase-out once a manufacturer sold 200,000 EVs, and a few other stipulations. The tax incentives also included plug-in hybrid electric and fuel-cell vehicles but excluded used vehicles.

This all changed when President Joe Biden signed the Inflation Reduction Act into law last August and its byzantine provisions kicked in beginning in 2023. The good news is the $7,500 tax credit remains, despite fierce Republican opposition. The bad news is Beltway policy wonks, trade isolationists, and lobbyists made the federal EV tax credit much more convoluted—it's still not completely resolved and is at times contradictory.

As of press time, here's a bulleted breakdown of the IRS's official IRA rules for what it refers to as "clean vehicle" tax credits. This covers the federal tax credit; state and local governments may offer other incentives.

In addition, the purchaser's modified adjusted gross income (AGI) can't exceed:

Buyers can use the modified AGI they filed in the year they take delivery of the vehicle or for the year before. If a buyer's modified AGI falls below the threshold in only one of the two years, they can still claim the credit. The "credit is nonrefundable, so you can't get back more on the credit than you owe in taxes" and "you can't apply any excess credit to future tax years," according to the IRS. In other words, if your federal tax liability is more than the $7,500 credit, you're good.

To qualify, a fully electric or plug-in-hybrid electric vehicle must:

The IRS defines MSRP as the retail price of the vehicle suggested by the manufacturer, including options, accessories, and trim but excluding destination fees. But it delineates vehicle types in vague and puzzling terms. (More on this below.)

The federal tax credit continues to apply to plug-in hybrid EVs if they meet the requirements outlined above. For the first time, used EVs are now eligible for a credit of up to 30 percent of the sale price (limited to $4,000). In addition to some of the above requirements—GVWR of less than 14,000 pounds, battery capacity of at least 7 kWh—a used EV must:

In addition, the buyer cannot have claimed another used vehicle credit in the three years before the purchase date, cannot be claimed as a dependent on another person's tax return, and cannot have an AGI that exceeds:

The same stipulations apply for new and used vehicle buyers: They can use the modified AGI filed for the year they take delivery of the vehicle or for the year before, the credit must not exceed their total federal tax liability, and it can't be applied to future tax years. Dealers report the required information to the buyer at the time of sale and to the IRS.

The IRS provides a list of used and new vehicles that qualify for the credit, and we provide this list. As of publication, clicking on some automaker links, such as Honda and Mercedes-Benz, reveals verbiage that reads: "This manufacturer has entered into a written agreement with us to become a 'qualified manufacturer' but hasn't yet submitted a list of specific makes and models that are eligible. Please check back here for updated information."

While some automakers have dragged their feet on providing info, the feds recently changed course on vehicle classification and qualification requirements, revising the method by which it determines whether an EV is considered an SUV and therefore gets to fall under the higher $80,000 price ceiling.

Originally the IRS based its decision on whether a vehicle is a car or a crossover or SUV on EPA fuel economy standards criteria for gas-powered vehicles. This meant some EVs that are clearly marketed as SUVs, such as the Cadillac Lyriq, were classified as cars. The IRS also considered the Volkswagen ID4 with RWD a car but an AWD model an SUV, while the Tesla Model Y was classified as a car regardless of powertrain, unless it had a third row, whereupon it became an SUV.

Then, on February 3 the Treasury announced a change that "will allow crossover vehicles that share similar features to be treated consistently. It will also align vehicle classifications under the clean vehicle credit with the classification displayed on the vehicle label and on the consumer-facing website FuelEconomy.gov. "  This means the Cadillac Lyriq that starts at $59,990 and the two-row Model Y Performance with a price of $57,990 now qualify for the tax credit, and buyers who have already taken delivery of one of the reclassified vehicles since the start of the year can claim the credit.

The battery component requirement (which will incrementally increase in future years) is even more confounding. A Volkswagen ID4 that's made in Germany doesn't qualify for a credit, but one built in Chattanooga, Tennessee, does. The U.S. Department of Energy provides an online VIN decoder for "verification of final assembly for vehicles acquired beginning January 1, 2023."

No word on whether the feds are working on a mineral-content decoder for consumers (probably not), but not only will this be difficult to decipher but it may also violate existing U.S. trade agreements (and is not currently enforced). The requirements are still in the "guidance" stage—D.C.-speak for buying time.

As the clock ticked on 2022, the Treasury Department and IRS announced that it decided to delay some of the EV tax credits eligibility restrictions. The Treasury also announced its guidance on which vehicles are eligible won't be ready until March 2023.  Until the IRS figures out the rules for meeting those requirements, which will be March at the earliest, the Treasury Department says the restrictions don't apply.

Asian and European automakers—which have heavily invested in new EV assembly plants in the U.S. —feel stung by the "final assembly in North America" clause that can disqualify their vehicles. Hyundai, which last year announced plans to build a $5.5 billion EV facility in Georgia, requested an exemption so that some of its Korean-built cars could qualify for the credit until the facility starts production in 2025.

In a statement, the European Union called the Treasury's December delay "a win-win" and said, "EU companies that provide their customers through leases with cutting-edge clean vehicles can benefit from the incentives."

The announcement also opened a semi-size loophole by disclosing that leasing companies can claim a federal tax credit for vehicles they purchase to lease to consumers—without the requirements that a vehicle must be assembled in North America and the restrictions on price and the buyer's income.

The vehicles must be sold to the leasing company by a qualified manufacturer, which means one that agrees to report certain vehicle data to the IRS that they meet the minimum battery capacity requirements of 7 kWh for light-duty vehicles under 14,000 pounds and 15 kWh for heavier commercial vehicles. Those who lease the vehicles aren't guaranteed the incentive, although it's not required leasing companies typically pass the credit onto the buyer.

During the push to get the IRA over the finish line last August, Sen. Joe Manchin (D-WV) groused about electric vehicle tax credits and dependence on overseas mineral supply chains. The Treasury Department's December backpedaling riled the senator since his crucial swing-vote support for the legislation was coupled to the battery components and minerals requirements provisions.

"The intent of the Inflation Reduction Act was clear—bring our energy and manufacturing supply chains onshore to protect our national security, reduce our dependence on foreign adversaries, and create jobs in the United States," Manchin vented in a statement issued the day of the Treasury's announcement.

He added that the Treasury's latest take "bends to the desires of the companies looking for loopholes and is clearly inconsistent with the intent of the law," and called on the department to "pause the implementation" of the credits until the guidance is issued.

This means the federal EV tax credit is still very much in flux, and with a new Republican-controlled House of Representatives could become a political football. We'll keep an eye on this ongoing D.C. drama and keep you posted on the next stage of the Fed's unfolding EV tax credit nightmare.