How The Government Now Promotes Electric Cars

July 26, 2023

Over the past few years, the federal and California governments have offered incentives to put more drivers in electric cars. But if you’ve put off the decision to get one, you may have noticed that fewer electric vehicles now qualify for the full federal tax credit. Sweeping changes created by the Inflation Reduction Act (Public Law 117-169), which amended the Qualified Plug-In Electric Drive Motor Vehicle Credit (IRC 30D), have significantly impacted which cars are eligible for the credit.

The federal tax credit for electric vehicles was put in place to encourage Americans to make more climate-friendly vehicle purchases and to help reduce the country’s reliance on gas. The general thinking was that more people would pay the high up-front cost of a new electric vehicle if they knew that they qualified for a significant tax break. (In 2021, the average sticker price of a new electric vehicle was $10,000 greater than its gas-powered counterpart.) To sweeten the deal, many states have their own incentive programs as well.

Under the Inflation Reduction Act, the amount of tax credit a purchaser receives will be impacted by their modified adjusted income, the MSRP of the vehicle, the final assembly location of the vehicle, and whether they meet the critical mineral and battery requirements. These variables mean that not everyone will receive the full benefits of the credit, and the list of qualifying vehicles has shrunk. Of note:

1. There Are Income Limitations

People who are “joint filers” for tax purposes must have a modified adjusted gross income lower than $300,000, while head-of-households must have a modified adjusted gross income lower than $225,000. All other filers cannot have a modified adjusted gross income above $150,000.

2. There Are Limitations on Qualifying Vehicles

For the vehicle to be eligible, the MSRP of a van, sport utility vehicle, or pickup truck must not be more than $80,000. For all other vehicles, the MSRP must not be more than $55,000. Further, to be eligible for any portion of the credit, the electric vehicle must have its final assembly take place in North America and have a battery capacity of at least seven kilowatt-hours. If you’ve noticed any particular vehicles dropping off the qualifying list, it’s likely due to these restrictions.

3. Tax Credits Will Vary

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Once a purchaser and the vehicle are cleared for eligibility based on the above criteria, the purchaser will receive a partial ($3,750) or a full ($7,500) tax credit, depending upon whether the vehicle meets mineral and/or battery component requirements. A vehicle can qualify for partial credit if a certain percentage of the battery’s critical minerals are extracted or processed in the United States or a U.S. free-trade agreement partner or recycler in North America. Similarly, it will qualify if a certain percentage of the vehicle’s battery components must be manufactured or assembled in North America. For both factors, the percentage will vary year by year. If an electric vehicle meets both requirements, it will be eligible for the full $7,500 tax credit. This requirement has greatly impacted which electric vehicles can and cannot be eligible for the tax credit, even when the other eligibility requirements have been met.

At this time, only ten cars qualify for the full federal tax credit. Eight of the fully qualifying cars are fully electric, while two are hybrid. These are: Chrysler Pacifica; Ford F-150 Lightning Pickup, Lincoln Aviator Grand Touring; Cadillac Lyriq; Tesla Models 3 and Y; Chevrolet’s Bolt, Blazer, Equinox, and Silverado Pickup. Other electric vehicles may qualify for partial credit, or other State-run incentive programs. But many will note that vehicles made by well-known manufacturers like Volvo, Volkswagen, Hyundai, BMW, Nissan, and Rivian have been left off this list. Even if otherwise qualifying, the critical mineral and battery components from these carmakers do not satisfy the new requirements put in place by the Inflation Reduction Act.

Looking only at costs, it may still be worth purchasing an electric vehicle, even without the incentives. While a new hybrid Volvo may not qualify for all the federal savings that a Tesla does, the yearly and lifetime cost of driving an electric vehicle make still make more economic sense than driving a gas-powered vehicle. On average, electric vehicle fuel costs are 60% less than gas-powered fuel costs, and many utilities are turning to more sustainable sources for electricity. Depending upon how much someone drives, the lifetime savings could be anywhere from $2,000 to $14,000 for electric vehicles when compared to the costs associated with gas-powered vehicles. That doesn’t include the potential tax savings, which may tip the scales towards taking the electric leap.