IRS Limits Electric Vehicle Tax Credit Eligibility

Up until recently, one of the biggest perks of buying and driving an electric vehicle (EV) was the tax credit that came along with it. Depending on the specific vehicle’s battery capacity, owners were eligible for a tax credit worth anywhere from $2,500 to $7,500. But while there were some basic parameters that had to be met in order to claim the credit, those rules are about to get way more stringent.

The IRS says anyone who takes possession of a new clean vehicle on or after April 18, 2023 must “meet critical mineral and battery component requirements to qualify for the credit.” In a bulletin that was updated on March 31, the IRS says that vehicles placed in service on or after April 19 will be eligible for a credit that depends on the vehicle meeting the critical minerals requirement ($3,750) and/or the battery components requirement ($3,750).

“A vehicle meeting neither requirement will not be eligible for a credit, a vehicle meeting only one requirement may be eligible for a $3,750 credit, and a vehicle meeting both requirements may be eligible for the full $7,500 credit,” the IRS states.

Before and After

For electric vehicles placed in service before or on April 17, 2023, the credit is calculated as a $2,500 base amount plus, for a vehicle which draws propulsion energy from a battery with at least seven kilowatt hours of capacity, $417, plus an additional $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours, up to an additional $5,000 beyond the base amount.

“In general, the minimum credit amount will be $3,751, representing the credit amount for a vehicle with the required minimum of seven kilowatt hours of battery capacity,” the IRS explains in its bulletin.

According to Consumer Reports, new EVs must also meet other eligibility criteria to qualify for a federal tax credit. For example, the vehicle must have an MSRP of under $55,000 for sedans and wagons and $80,000 for SUVs, vans and trucks (calculated before dealer discounts and negotiation). It must also be assembled in North America. Also, new-car buyers must have an annual adjusted gross income below $150,000 for single tax filers and below $300,000 for married couples filing jointly.

Will it Hurt EV Sales?

Occupying a fairly nascent corner of the broader automotive market, EV makers and dealers could feel the pinch of the IRS’ new tax credit rules. Because fewer new vehicles will qualify for the full $7,500 tax credit, consumer acceptance of EVs could wane at least temporarily. This, in turn, could sideline the current presidential administration’s goal that 50% of passenger vehicles sold in the U.S. be running on electricity by 2030.

Electric vehicles now cost an average of more than $58,000—a price that’s beyond the reach of many U.S. households, the Washington Post reports. “The tax credits are designed to bring prices down and attract more buyers. But $3,750, half the full credit, may not be enough to entice them away from less-costly gasoline-powered vehicles.”

Consumer Reports says that a full list of vehicles that automakers have certified as meeting the new guidelines will be available on the IRS website on April 18.