Out of the hundreds of billions of dollars in climate spending in the recently passed Inflation Reduction Act, the most-buzzed-about goodie might be the one for drivers: a 10-year tax credit for electric vehicles, up to $7,500 for new electric cars and trucks as well plug-in hybrids, and up to $4,000 for a used electric or plug-in vehicle. As EVs near a breakthrough in the car market, automakers offer more electric models, and sales of electric models break records, the credits could usher along several important clean-transport goals: boosting supply and demand for EVs, creating more American jobs in auto and battery manufacturing, and ensuring that electric vehicles aren’t just luxury playthings, but a mainstream transportation option.
The provision also raises a pressing question for many drivers: When can I get a cheaper electric? Now??
To judge by the excitement, there seems to be some confusion about when the credits take effect, which products qualify, and how they can take advantage. Meanwhile, carmakers must figure out how to adjust their EV production depending on how many Americans decide they’re now ready to buy one. The market is about to make a huge transition, but state and city officials, too, will have to figure out how much more municipal charging capability their towns will need. How transformational will these credits be? Hop in the passenger’s seat and we’ll work through it.
Which Cars—and Buyers—Qualify for the Money?
The first EV tax credits in the United States were established in 2008 and 2009, but for some manufacturers (like Tesla and GM), those incentives have run out and are no longer available to those companies’ customers. The IRA, which Biden signed on Aug. 16, changes that. Beginning next year, the original credits will be extended and allow currently disqualified automakers to take advantage on their taxes, while from 2024 onward, customers will be able to use credits they’re eligible for to automatically get a sales discount.
Right away, cars qualifying for the new credits have to have undergone “final assembly” within North America (so EVs put together Mexico and Canada are kosher). The Treasury Department has a handy list of about 20 models that appear to meet this standard right now. You won’t find anything from Hyundai, Porsche, Toyota, or Kia on there, due to those automakers’ foreign bases and factories; the Alliance for Automobile Innovation estimates that 70 percent of previously qualifying models can no longer get a rebate thanks to IRA guidelines. (However, as NPR notes, you may claim $3,750 of the tax credit for a given EV if “40 percent of the critical minerals in EV batteries are sourced from countries with which the U.S. has a free trade agreement.”)
For now, the list also excludes otherwise-qualifying cars made by GM, Tesla, and Chevrolet, which have each sold more than 200,000 EVs over time and thus no longer qualify for credits under pre-IRA government rules. The good news for these companies is that starting in 2023, that sales cap will officially be lifted thanks to an IRA provision. So as long as they ensure final assembly stateside for their EVs sold in the U.S., those cars will again get the $7,500 credit.
This aspect of the bill has been a bit of a headache for car manufacturers who have not onshored the bulk of their operations. Causes for this are myriad: cheaper foreign labor, larger EV markets in Europe and Asia, underdeveloped EV branches from companies that just got into the game, and Chinese and Taiwanese dominance of necessary EV supplies like critical minerals, rare earth elements, and semiconductors. Tesla and GM have done a lot of work over the past decade to bring more of their assembly lines to the states, while other carmakers have lagged behind. The clock is ticking for the stragglers: By 2024, the makeup of qualifying EVs’ batteries will have to be at least 50 percent sourced from North America; that benchmark will jump to 80 percent in 2026. Finally, in 2028, qualifying EVs will be limited to those with batteries fully sourced from North American minerals and parts. Plus, in 2024, vehicles cannot feature parts from a “foreign entity of concern,” which basically refers to parts from competitor China.
What about customers? Under the current EV tax credit framework, there are no income limits. But starting in January, individuals who make over $150,000 a year—and couples with an annual household income of over $300,000—will not qualify for the new-EV credit. There’s a similar structure for used cars: Individuals who make over $75,000 a year, and couples with a collective annual income of over $150,000, will not be able to claim the $4,000 used-EV credit. Prices of EVs themselves will also be affected come 2023, as you won’t be able to claim credits on sedans that cost over $55,000 or trucks and SUVs and vans listed for sale at over $80,000. For used electric cars, customers will not be able to claim credits on anything costing over $25,000 (although used cars will not have to follow made-in-America requirements). In essence, this makes things a lot harder for upstart electric carmakers like Rivian and Lucid, which have halted production of some of their cheaper models due to supply-chain struggles. But for EV makers that wish to target the mass market, there’s a carrot here to cheapen the product.
When Do the Tax Credits Take Effect? What About the Car I Just Got?
First of all, if you just got a car that qualified under the old tax credit rules, but not under the new, narrower ones, don’t worry. If you bought any previously qualifying EV before Aug. 16, the good news for you is that the new IRA standards don’t retroactively apply, as the IRS explains. The same goes for a car you agreed to purchase in writing before Aug. 16 but did not or will not receive until after that date. This applies no matter where final assembly occurred, so if you got a Kia EV on Aug. 15, you got it just in time. In all cases, you can claim the vehicle when you file your taxes next year. (Yes, all of this is refundable. As a bonus, starting in 2024, you’ll also be able to directly transfer these credits to the car dealer from which you buy a qualifying EV, in order to reduce the immediate price point.)
Meanwhile, additional incentives likewise vary state by state. Kelley Blue Book has a thorough guide to EV incentives in 50 states plus the District of Columbia.
What Else Is the Government Doing for My Tesla?
It may appear as though the IRA imposes some onerous obligations on car companies and dealers, but it’s also providing quite a bit of assistance along the way. Last month, the Department of Energy loaned $2.5 billion to a battery manufacturer co-owned by GM and LG Energy Solution to construct more battery factories. In addition, the IRA will disburse $100 billion to loan programs that already work to finance domestic EV production. There will be $20 billion of loans to build new clean vehicle plants throughout the U.S., as well as $2 billion in grants to transform auto manufacturing facilities into green carmakers. Last year’s infrastructure bill doled out $7.5 billion to construct EV chargers along highways, with the caveats that they be functional 97 percent of the time and also use multiple ports that can charge different types of EVs. The administration is also spending tens of billions of dollars on battery-efficiency research, mining ventures for important clean energy minerals like lithium and cobalt, and domestically engineered semiconductors and chips to power green cars. As the New York Times put it earlier this month: “It may take a few years, but eventually the legislation will help make electric cars cheaper than gasoline and diesel vehicles.”
After parsing the IRA’s new measures, one may get the impression that its EV program is a mixed blessing. A lot of formerly eligible electric rides were disqualified from the credits at the moment of signing, and more federal agencies, like the Energy and Treasury departments, will have to issue further guidance on the many different aspects that could or could not qualify a car for the new framework; actually building new factories, batteries, chips, chargers, and automobiles stateside to full capacity will not be a quick task. EV-focused publication Electrek has lists of models that could qualify for next year’s rebates, although these will not be certain until the administration clarifies how the legislation will operate with currently viable options for purchase. Along the way, there will be trial and error in EV building and adoption. For EV-curious drivers, the IRA’s transformation of the market won’t be nearly fast enough, and many may turn to gas-powered hybrids in the meantime. But the hope is that these measures will lock in cheap EV production and use for years to come, with domestic creation and mining helping to avoid supply-chain bottlenecks that increase prices—and to bring back Rust Belt jobs that have disappeared over time. There will be some brief pain during the transition. The bet is that the cheaper prices will eventually make it all worth it.