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Which EVs Qualify for the New Electric Vehicle Tax Credit? It’s Complicated.

Consumer Reports 8/24/2022 Keith Barry

Electric vehicles are on a roll, lately. New EV tax credits should increase popularity this year and next, and California is set to approve a new rule Thursday phasing out sales of new gas-powered vehicles, starting in 2026.

© Provided by Consumer Reports

By Keith Barry

Research

Interest in electric vehicles is predicted to surge next year due to 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—should together 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 thanks to the latest federal tax credit changes. Still, details in the fine print have caused some confusion about which new vehicles might qualify for the immediate savings.

As part of a broad new Inflation Reduction Act—designed to address climate change, healthcare, and taxes—there is a new tax credit of up to $4,000 on used electric cars and revised tax credits of up to $7,500 on certain new EVs. (See the list of 2022 and 2023 models that qualify.)

But due to numerous new rules about where new EVs must be built and their batteries sourced, automakers argue that too few vehicles qualify, and EV advocates are concerned that the requirements may make it difficult for consumers to find a vehicle that qualifies for the credits. In the meantime, many shoppers who are in the market for an EV right now are waiting for more details to be finalized so they can find out which vehicles are eligible for a credit, and how much that credit could be.

"If you’re interested in an EV or a plug-in hybrid and it qualifies for a tax credit today, don’t wait, because it might not qualify next year. But if you’re considering a used EV, it might be worth waiting," says Jake Fisher, senior director of Consumer Reports’ Auto Test Center.

A requirement that vehicles be made in North America in order to qualify for a tax credit went into effect today as soon as President Biden signed the law, while some other rules don’t apply until after regulations are finalized.

Among other provisions, the new bill:

• Offers a new tax credit of up to $4,000 on used EVs put into service after Dec. 31, 2023.

• Takes away the 200,000 vehicle cap on tax credits that made EVs and plug-in hybrids from Tesla, GM, and Toyota ineligible.

• Does away with today’s tax credits for pricey EVs—such as the Hummer EV, Lucid Air, and Tesla Model S and Model X. 

• Eliminates tax credits for vehicles not assembled in North America, including the BMW i4, Hyundai Ioniq 5, Kia EV6, and Toyota bZ4X.

The bill also immediately restricts the full tax credit on new EVs to vehicles with battery minerals sourced from countries that the U.S. has a free trade agreement with or recycled in North America, and with battery components sourced from North America.

Starting in 2024, if any minerals or components are sourced from “foreign entities of concern,” including China or Russia, the vehicle will not qualify for any tax credit. An analysis this year of the EV supply chain from the International Energy Agency shows that the vast majority of minerals, components, and battery cells are currently sourced from China. This restriction doesn’t apply to used vehicles.

“The EV tax credit requirements will make most vehicles immediately ineligible for the incentive,” wrote John Bozzella, president and CEO of the Alliance for Automotive Innovation, an auto industry trade group.

A Congressional Budget Office analysis shows that the bill budgets for $85 million in new EV tax credits for the 2023 fiscal year, which only translates to about 11,000 new vehicles sold with full $7,500 credits. That number jumps to about 60,100 EVs in 2024.

For comparison, about 630,000 battery-electric and plug-in hybrid vehicles were sold in the U.S. in 2021—a number that must grow if the U.S. is to meet its greenhouse gas reduction targets. Those goals call for half of all new light-duty cars sold in 2030—accounting for millions of vehicles—to be zero-emission vehicles.

“It’s good that it’s focused on building a base of processing and manufacturing here, but at the end of the day it’s going to be really complex to implement and explain to consumers," says Brett Smith, technology director at the Center for Automotive Research.

As far as used vehicles are concerned, the CBO estimates 24,750 used EVs will qualify in 2023, and about the same number in 2024.

Despite this initial confusion, the bill is a major achievement overall, says Quinta Warren, PhD, associate director of sustainability policy for Consumer Reports.

“This bill has enormous potential to be a game-changer for consumers and clean transportation,” she says. “Our research shows that a growing number of consumers are interested in getting electric vehicles, but many have questions about costs and charging, and this bill would help lower some of those barriers.”

The bill, which was passed by the Senate and the House, was signed into law by President Biden earlier today.

A CR survey shows that more than half of car buyers would be more likely to purchase an EV if a tax credit brought down the price. (You can find out which vehicles currently qualify here, at CR’s EV incentive finder.)

Until now, buyers of electric cars and plug-in hybrids could get up to a $7,500 federal tax credit as long as the manufacturer hasn’t sold more than 200,000 qualifying vehicles. Once an automaker reached that point, the credit began to phase out—which is why Tesla and GM vehicles have not qualified for a federal tax credit for several years. Toyota recently reached this sales milestone and will see its tax credits ratchet down, as well. 

Chris Harto, CR’s senior policy analyst for transportation and energy, says that the provisions set forth in the bill might slow EV sales in the short term, but that it’s a “massively positive” benefit for EV adoption as a whole.

“Over the longer term automakers will adjust, bring their EV and battery manufacturing supply chains to North America, and ensure that American tax dollars are going to support American jobs,” he says. “Even though some vehicles that currently qualify will become ineligible, those tax credits were going to run out eventually—and likely pretty quickly for most popular vehicles—so the benefit would have been short-lived.”

Ultimately, the new rules will transition EV manufacturing away from China and toward North America, says Smith, but that shift could take time. Manufacturers are already making major investments in building batteries in the U.S., but supplying those factories with raw materials from North America could remain a problem, especially considering China’s dominance in mining. “Generally, it’s going to be tough to create the processing here and really tough to create the mining here," he tells CR.

Which Cars Might Qualify for the New EV Tax Credit?

Depending on where their batteries are manufactured, only cars with a final assembly point in North America will qualify for the tax incentive. In addition, there are new 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. And vehicles will still have to meet both of those aforementioned battery manufacturing targets to qualify for the full tax credit.

Although we don’t know which vehicles will meet the battery portion of the tax credit, these are the current and upcoming models made in North America with versions that cost less than the bill requires:

Of those vehicles, it remains to be seen which ones would meet the battery requirements. For example, the Chevrolet Bolt and its batteries are assembled in Michigan, so its qualification for a tax credit would be determined by which countries those battery minerals are sourced from. Other vehicles have cells that might be manufactured at multiple factories in different countries. “Once you have cells coming from two different places, how do you figure out the qualification?" asked Smith.

Because their prices are above $55,000, the Cadillac Lyriq and Tesla Model Y would qualify only if they are classified as SUVs and not station wagons, and if buyers don’t choose options that bring the price over $80,000.

For some vehicles, the credit might only be partial. “I’m thinking that maybe the Tesla Model 3 and Y would qualify for half of the $7,500 credit under the battery components requirement but not likely the minerals requirement,” says Loren McDonald of EV Adoption, an electric vehicle research, analysis, and marketing firm.

Which Cars Definitely Won’t Qualify for the New EV Tax Credit?

These current and upcoming EVs (and two fuel-cell vehicles) are not made in North America and therefore won’t qualify for a tax credit, although that might change in the future if their assembly location changes.

In addition, regardless of where they are assembled, these vehicles are too expensive and will not qualify for any tax credit:

EV Tax Credit Details in the Inflation Reduction Act

• New electric and fuel-cell vehicles will get a tax credit 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 affordable EVs.)

• 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 sourced. These requirements get stricter each year through 2026. The bill calls for proposed regulations on the specifics of these requirements by the end of December, which will likely be finalized some time in 2023.

• Only vehicles assembled in North America will be eligible for a tax credit.

• The exclusion of vehicles with components from “foreign entities of concern,” including Russia and China, will go into effect Dec. 31, 2023.

• 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 be below $225,000 and individual filers will qualify only with income below $150,000.

• 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.

• 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.

Editor’s Note: This article, originally published on Aug. 8, 2022, has been updated to clarify which provisions of the legislation go into effect on which dates. It was also updated on 8/16/22 after the bill was signed.

Consumer Reports is an independent, nonprofit organization that works side by side with consumers to create a fairer, safer, and healthier world. CR does not endorse products or services, and does not accept advertising. Copyright © 2022, Consumer Reports, Inc.

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