Changes to EV Tax Credits: Where Your Battery Is Made Matters

Buying an electric vehicle just got more complicated — but cheaper, if you can find the right model.

The Inflation Reduction Act — a centerpiece of President Joe Biden’s plan to tackle climate change — renews the existing $7,500 tax credit for new EVs and introduces a $4,000 credit for used EV purchases. Both credits are valid through 2032. It also removes manufacturer caps that limit the eligible number of EVs an automaker can sell before its models no longer qualify for the credit.

But it also restricts models that qualify. The vehicle itself must be assembled in North America, and battery parts must be sourced from the U.S. or one of its free-trade partners. Cars must sticker at $55,000 or less; SUVs and trucks at no more than $80,000.

Not all provisions of the bill go into effect immediately, so you may have to wait until next year or 2024 to take full advantage.

Here’s what you need to know about how the bill — which Biden signed into law Aug. 16 — could affect your next EV purchase.

Many new EVs ‘immediately ineligible,’ automakers warn

One of the biggest changes to the credit is the removal of manufacturer caps starting next year, meaning popular EVs from Tesla and General Motors will be eligible again. But the legislation also implements stricter rules on which models qualify for the credit — causing the Alliance for Automotive Innovation, the auto industry’s lobbying group, to warn that the number of eligible EV models will be slashed by 70%.

“Unfortunately, the EV tax credit requirements will make most vehicles immediately ineligible for the incentive,” alliance CEO John Bozzella said in a statement. “That’s a missed opportunity at a crucial time and a change that will surprise and disappoint customers in the market for a new vehicle.”

Here’s a look at some of those requirements:

North American assembly: Qualifying EVs must be assembled in North America, effective immediately.

Price caps: Eligible EVs need to be under manufacturer’s suggested retail price thresholds. SUVs, vans and trucks must be $80,000 or less, and all other vehicles must be $55,000 or less.

Domestic sourcing requirements: The bill introduces two criteria to qualify for the full $7,500 credit. If only one criterion is met, the credit is cut in half. If none are met, the vehicle isn't eligible at all. These requirements are expected to take effect by the end of the year.

• A percentage of the value of battery components must be manufactured or assembled in North America, starting at 50% and increasing to 100% by 2029.

• A percentage of the value of critical minerals in the battery — such as lithium and cobalt — must be extracted or processed in the U.S. or a country that’s a free-trade partner, or be recycled in North America. The requirement starts at 40% and grows to 80% by 2027.

One exception: If you purchased or have a written sales order for an EV from earlier this year, before Biden's signing of the bill, you can still claim the previous version of the credit — even if your vehicle is delivered next year.

A new credit for used EVs

Starting next year, buyers of used EVs will be able to receive a tax credit worth 30% of the sale price, capped at $4,000. To be eligible, the vehicle must be:

• At least two model years old when sold.

• Purchased from a dealer.

• Purchased for a sale price of $25,000 or less.

In addition, an EV can qualify for the used credit only once in its lifetime. A buyer must wait three years before they’re eligible for the used EV credit again.

Not everyone qualifies for the EV credit

To qualify, your modified adjusted gross income cannot exceed certain limits, depending on your federal tax filing status and whether you want the new or used EV credit.

If you're purchasing a new EV, your annual income must be within:

• $150,000 for individuals.

• $225,000 for heads of household.

• $300,000 for joint filers.

For a used EV purchase, your annual income must be within:

• $75,000 for individuals.

• $112,500 for heads of household.

• $150,000 for joint filers.

Dealer can apply EV credit at time of purchase

Starting in 2024, you’ll no longer have to wait for tax season to claim the credit. Instead, you can transfer the credit to the dealer, which it will apply at the time of sale — meaning the price you pay will reflect the discount, so you don’t have to worry about it come tax time. For that to happen, the dealer is required to disclose to you the MSRP of the vehicle, as well as the amount of the tax credit and any other applicable incentives.

Previously, you could enjoy the full $7,500 credit only if your federal tax bill was at least that much — making this a welcome change for car shoppers.

Should I buy an electric vehicle now?

With all the changes to the EV tax credit, now might seem like a good time to buy an electric vehicle. But keep in mind that some of the benefits — such as the lifting of manufacturer caps and applying the credit at the time of sale — don’t go into effect until next year or 2024.

Demand for these vehicles is at a high and outpacing supply, making them “really hard to find and really hard to get,” says Mike Rumple, a car-buying consultant based in Warren, Ohio. Even if you’re able to find one on a lot, dealers are reportedly marking up EVs by thousands of dollars. Some EVs are even selling for more used than they did new, so if you can wait for a new one to arrive, that may be the better option, he says.

In July, the average transaction price for a new EV was $66,645 — more than $18,000 higher than the average across all new vehicles that month, according to Kelley Blue Book.

“The best thing to do — and this is for any vehicle — is to either order it directly from the factory, or to find an incoming unit that’s not on the lot yet,” Rumple says, adding that buyers looking for the best deal should get prices in writing from multiple dealers.