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Which Electric Cars Qualify for Federal Incentives Under the New Rules?

By 08/18/2022 9:33am

A pair of electric vehicles sit parked against a sunset. We see them from the rear. The one on the left is plugged into a charging station.Nineteen cars – all electric vehicles (EVs) or plug-in hybrids (PHEVs) – likely qualify for a federal tax credit today. A handful more will gain eligibility early in 2023. All will lose eligibility when government agencies finish drafting rules the law requires unless the automotive industry makes quick changes.

That’s the takeaway from a list of likely eligible vehicles published by the U.S. Department of Energy’s Alternative Fuels Data Center late yesterday. But the word “likely” is doing some work there. Even the government seems less than sure about how the new government incentive program works.

Changes to the Law

President Biden signed the Inflation Reduction Act into law on Tuesday. Among other things, it remakes how America’s tax credit system for electric vehicles works.

Until Tuesday, Americans could buy many electric car models and qualify for a $7,500 rebate the next time they filed their federal income taxes. Not every EV was eligible because the discount went away after a manufacturer had sold 200,000 electric cars.

Under the new rules, the 200,000-car cap will disappear on January 1, 2023. What was once a tax rebate after purchase can now become a discount at the time of sale. But other restrictions have come into effect.

Some are income caps. Only individuals reporting adjusted gross incomes of $150,000 or less qualify for the discounts. The limit moves to $225,000 for those filing as head of household and $300,000 for joint filers.

Others are price caps. The discount now applies only to cars priced under $55,000 and trucks and SUVs priced under $80,000.

But the change with the biggest impact involves where the cars are manufactured. Only vehicles assembled in North America qualify for the new tax incentives.

Automakers build many models of electric cars sold in America on other continents. The Alliance for Automotive Innovation, an industry trade group, reports that there were 72 EVs eligible for the old tax credit. About 50 have been ruled ineligible because of where automakers assemble them.

Trim Level Matters

By now, you may be frustrated that we keep using terms like “about 50” and “likely qualify.”

The Department of Energy explains, “for some manufacturers, the build location may vary based on the specific vehicle, trim, or the date in the Model Year when it was produced because some models are produced in multiple locations.”

If you’re currently shopping for one of these cars, the only way to determine whether the discount will apply is to input the vehicle identification number (VIN) of the specific car you want to buy into the VIN decoder at the National Highway Traffic Safety Administration’s website. That will tell you where the government considers the car to have received “final assembly.”

If it’s in North America, and the vehicle falls under the price caps, you’re probably safe claiming the credit.

The Department of Energy’s List of Currently Qualifying Vehicles

According to the Department of Energy, 2022 vehicles eligible for the credit include:

The Department is still receiving information on 2023 models. So far, it has listed these 2023 models as eligible:

A handful of cars are not eligible because their manufacturers have exceeded the 200,000-vehicle cap. That cap disappears on January 1, 2023, which may make these cars eligible again:

Even The Government May Not Know How This Works

Congress drafted and passed the Inflation Reduction Act quickly as Democrats in the Senate reached a surprise agreement late last month. That has left the government agencies charged with enacting it scrambling to do so soon.

Some of the information they publish may change. The Alternative Fuels Data Center says its list of eligible vehicles “will be updated as more information becomes available.”

We expect to see a few corrections soon. The Lucid Air, for instance, is on the list. But the Air is a sedan with a price tag starting at $87,400 – well over the law’s $55,000 cap for sedans.

Unless we’ve misunderstood something in our reading of the law, the Air shouldn’t appear on the list.

Manufacturers May Make Changes

Carmakers could adjust some prices to help customers obtain the credit.

The Tesla Model 3, for instance, comes in three trim levels. Just the least expensive, the Model 3 Standard Range, currently qualifies.

At press time, Tesla had removed pricing for the Model 3 Long Range from its website. That may be a coincidence. But we wouldn’t be surprised to learn that the automaker was exploring lowering its price to meet the new requirements.

Other manufacturers could bring production to the U.S. to meet the new rules. Kia, for instance, builds its electric vehicles in South Korea. But the company is in the process of building a new plant in Georgia to bring production stateside. Kia’s EVs may be eligible when that factory opens.

Battery Component Rules Will Change Everything Again

The rules aren’t done changing.

The law introduces another new wrinkle aimed at increasing American manufacturing, which will change the list of qualifiers over time.

It requires government agencies to draft new rules for sourcing critical battery components.

We don’t know precisely when agencies will publish those rules. But, as soon as they do, automakers must obtain 40% of critical battery components from the U.S. or its major trade partners. On January 1, 2024, that percentage steps up to 50. It then increases every year until topping out at 80% in 2026.

According to the Alliance for Automotive Innovation, no current EV meets even the minimum 40% requirement.

Since we don’t know when the sourcing rules will be published, we don’t know when they will take effect. But industry sources worry that developing a supply chain to get critical battery components from the U.S. or its major trade partners could take longer than the law allows.