Some Teslas and Leased EVs Qualify for Full Electric Vehicle Tax Credit in 2023
Additional rules around which vehicles qualify for the $7,500 tax credit are coming in March, so act fast if there’s a car you want to buy
If your plans for 2023 include getting a tax credit of up to $7,500 on a new electric car, 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 this week, the IRS released a growing list of vehicles that should qualify for the tax credit starting Jan. 1. Those who choose to lease instead of buy may be eligible to claim a credit on vehicles that aren’t on the list. However, starting in March, new rules could reduce the credit amount that buyers of some vehicles may be eligible for. Consumer Reports will continue to update this article as we learn more information.
The Inflation Reduction Act of 2022—designed to address climate change, healthcare, and taxes—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 in order to qualify for a tax credit—went into effect as soon as President Joe Biden signed the law in August. Others are in effect as of 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 these are a requirement that buyers meet income restrictions, that the vehicle is priced below a certain amount, and that it is 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.
@consumerreports The Inflation Reduction Act changes which new EVs get a tax break and for the first time includes a credit for used-EV buyers. #electricvehicle #cartok #carsoftiktok #inflationreductionact ♬ original sound - Consumer Reports
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, 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.
Whether a vehicle counts as an SUV or a wagon could be confusing for some buyers, because advertising terms don’t always fit neatly with the definitions the Treasury Department is using, which are the same definitions the Department of Transportation uses for fuel-economy regulations. They require a vehicle to meet certain weight or off-road capability requirements to be considered an SUV. For example, the Tesla Model Y seems to be classified as an SUV if it is equipped with seven-passenger seating and as a wagon if it’s equipped with seating for five. Curiously, the Ford Escape PHEV is classified as an SUV, while the similar Lincoln Corsair PHEV is classified as a wagon.
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 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 $80,000 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)
How You Can Take Advantage of the Inflation Reduction Act
CR explains how buying a heat pump for your home could get you thousands of dollars in federal tax credits and state rebates. Plus, you might be eligible for a rebate when you buy an electric range, cooktop, or wall oven.
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 are purchased, although that might change in the future 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 are purchased, although dealers may pass a tax credit on to consumers if the vehicle is leased:
- Audi E-Tron GT
- BMW i4
- BMW i7
- BMW iX
- Chevrolet Silverado EV (certain options and trim levels)
- Ford F-150 Lightning (certain options and trim levels)
- Genesis G80 Electric
- GMC Hummer EV
- Lucid Air
- Mercedes-Benz EQE
- Mercedes-Benz EQS
- Porsche Taycan
- Rivian R1T (certain options and trim levels)
- Tesla Cybertruck (certain options and trim levels)
- Tesla Model S
- Tesla Model X
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 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 up front 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 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, or $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.
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 as 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.
Editor’s Note: This article, originally published Aug. 8, 2022, was updated Aug. 16, 2022, to clarify which provisions of the legislation go into effect on which dates. It was also updated Dec. 21, 2022, and Dec. 30, 2022, to include new information provided by the Treasury Department and will continue to be updated as new vehicles are added to the IRS list.