Tesla cars sit on a lot in Chicago on March 28, 2022. A $7,500 tax credit for purchasers of new electric vehicles is changing again after the U.S. unveiled new guidelines that will impact the list of car models that qualify.

Tesla cars sit on a lot in Chicago on March 28, 2022. A $7,500 tax credit for purchasers of new electric vehicles is changing again after the U.S. unveiled new guidelines that will impact the list of car models that qualify. / Getty Images

Updated April 17, 2023 at 10:27 AM ET

The federal tax credits for electric vehicles, which have been a cause of confusion for automakers and car shoppers alike for months, are about to go through another big change.

It's all because of battery sourcing requirements that are kicking in.

The new rules, which were announced last month, require a certain percentage of battery minerals and components be sourced from North America or a U.S. trade partner. They are meant to incentivize U.S.-based production and were a part of the massive climate bill that revamped the tax credit for electric cars.

The IRS on Tuesday released an updated list of cars that will qualify under thew new battery guidelines on FuelEconomy.gov. It goes into effect on Tuesday.

Overall, General Motors and other U.S. auto makers stand to benefit the most from the revamped rules.

Several of the most popular models — like the Tesla Model Y and Chevy Bolt — will still get the full $7,500.

But starting Tuesday, a half a dozen models will get a $3,750 credit instead, and vehicles including the VW ID.4, Nissan Leaf and Rivians will lose the credit altogether.

Here's what to know.

After Tuesday, fewer vehicles will be eligible for $7,500

The $7,500 tax credit is actually two separate credits, worth $3,750 each. Right now every qualifying vehicle gets both credits, but starting April 18, vehicles could end up qualifying for neither, one, or both.

The IRS says the following vehicles will still be eligible for both tax credits, worth $7,500:

  • Cadillac Lyriq
  • Chevy Silverado EV
  • Chevy Bolt
  • Chevy Bolt EUV
  • Chrysler Pacifica PHEV
  • Ford F-150 Lightning
  • Lincoln Aviator Grand Touring plug-in hybrid
  • Tesla Model Y (AWD, Long Range AWD and 2022 Performance)
  • Tesla Model 3 (Performance)

The upcoming Chevy Blazer and Chevy Equinox EVs will also be eligible for both credits.

These vehicles are now eligible for a single tax credit, worth $3,750:

  • Ford E-Transit
  • Ford Escape plug-in hybrid
  • Jeep Wrangler 4xe
  • Jeep Grand Cherokee 4xe
  • Lincoln Corsair Grand Touring plug-in hybrid
  • Mustang Mach-E
  • Tesla Model 3 (Standard Range RWD)
A man looks at a Chevy Bolt EUV at the North American International Auto Show in Detroit on Sept. 14, 2022. The IRS has announced that Chevy Bolts and Bolt EUVs will qualify for the full tax credit.

A man looks at a Chevy Bolt EUV at the North American International Auto Show in Detroit on Sept. 14, 2022. The IRS has announced that Chevy Bolts and Bolt EUVs will qualify for the full tax credit. / AFP via Getty Images

And these vehicles that were recently eligible will no longer receive any tax credit after April 18:

  • Audi Q5 TFSI e Quattro
  • BMW 330e
  • BMW X5 xDrive45e
  • Genesis Electrified GV70
  • Nissan Leaf S, S Plus, SL Plus, SV and SV Plus
  • Rivian R1S
  • Rivian R1T
  • Volkswagen ID.4 (VW had expected to qualify for at least one credit)
  • Volvo S60 (PHEV), Extended Range and T8 Recharge (Extended Range)

So, if you're in the market for a Model Y or Ford Lightning, nothing is changing. You can still get the entire $7,500 credit.

But if you had your eye on a Mustang Mach-E, or you're waiting on a Tesla Model 3 RWD, getting that vehicle delivered on Monday instead of Tuesday could mean $3,750 more in tax savings. (Note that the IRS says the vehicle needs to be delivered to the taxpayer, not just ordered, on or before the 17th.)

So wait, why is the tax credit changing yet again?

Last year's climate law, championed by the Biden administration, not only overhauled the tax credit for electric cars; it also added a number of restrictions designed to shore up U.S. supply chains.

In short, the idea was that car companies that wanted to take advantage of the tax credit would need to meet complicated rules meant to boost U.S-based production.

Those rules covered not only the manufacturing of the car, but also the sourcing of the materials that go into the batteries of the vehicles.

One of the $3,750 credits focuses on the raw materials inside batteries: a certain percentage of critical minerals, like lithium, graphite and cobalt, need to be mined or processed in the U.S. or a trade partner.

The other $3,750 credit is about battery manufacturing: a certain percentage of the battery components, like anodes, cathodes and electrolytes, need to be manufactured or assembled in North America.

Determining the specific guidelines for each, however, was so complicated that Treasury effectively delayed this aspect of the climate bill from going into effect while they worked it out.

The IRS finally came up with the rules late last month, hence the change in which cars will be eligible for the tax credit.

Unsurprisingly, foreign automakers have lost the most in this domestic-manufacturing push. Hyundai and Kia lost access to the tax credit earlier because they don't yet build their EVs in North America. Now Nissan and Volkswagen can't benefit from the tax credit either, because their batteries don't have enough domestic or partner-country content.

Vehicles from four American automakers are still eligible: Tesla (the dominant EV automaker), Ford, GM and Stellantis. Rivian, another American auto company, did not hold onto its tax credit.

People look at the Cadillac Lyriq at the North American International Auto Show in Detroit on Sept. 14, 2022. The electric car will still qualify for the full tax credit under the latest IRS guidelines.

People look at the Cadillac Lyriq at the North American International Auto Show in Detroit on Sept. 14, 2022. The electric car will still qualify for the full tax credit under the latest IRS guidelines. / AFP via Getty Images

But beware: being 'eligible' doesn't guarantee a tax credit

In order to get a tax credit, other requirements still apply. Vehicles must meet battery size and vehicle weight requirements and, more significantly, meet these two requirements:

  • Be assembled in North America
  • Have a sticker price of less than $55,000 for cars and $80,000 for SUVs and trucks

Features can push up the sticker price and assembly locations can vary, so for any individual car, a buyer has to check that those assembly requirements and price limits are met.

And if you want an electric car, check your income as well.

It's not just the car that needs to qualify: there's an income cap for buyers. It's based on "modified adjusted gross income" — your income after certain deductions (like retirement contributions). It's generally line 11 on your 1040 form, but if you have foreign income or income from Guam or Puerto Rico, you'll need to add those back in.

The caps for new vehicles are:

  • $300,000 for married couples filing jointly 
  • $225,000 for heads of households
  • $150,000 for all other filers

You qualify if you earned less than the cap in either the current tax year or the previous year, so a single year of high income won't disqualify you.

Ford F-150 Lightning pickup trucks are shown at the Ford Rouge Electric Vehicle Center in Dearborn, Michigan, on April 26, 2022. The Lightning will still be eligible for the full $7,500 tax credit, but it also depends on other criteria including the sticker price of the vehicle and the buyer's income.

Ford F-150 Lightning pickup trucks are shown at the Ford Rouge Electric Vehicle Center in Dearborn, Michigan, on April 26, 2022. The Lightning will still be eligible for the full $7,500 tax credit, but it also depends on other criteria including the sticker price of the vehicle and the buyer's income. / Getty Images

Start thinking about next year's taxes

This year, you also need to make sure your tax liability is big enough that you can actually use the credit. It doesn't roll over. If you qualify for a $7,500 credit but only owe $3,000, your tax bill would be reduced to zero (and you'd be refunded any money withheld from your paychecks) but the extra $4,500 goes poof; it doesn't get paid out to you.

Next year, in 2024, this will change. You'll be able to receive the tax credit as an immediate discount on the price. So as long as you qualify, you'll get the benefit — regardless of the size of your tax bill.

What about used vehicles?

There is a lower tax credit for used electric vehicles, and it's not changing.

Here's what you need to know. There is an income cap, and like with new cars, it's based on modified adjusted gross income (line 11 on your 1040, unless you have foreign income or income from a territory to adjust for). And like with new vehicles, you qualify if you are under the income cap in either the current or the previous year. The income caps for used vehicles are:

  • $150,000 for married couples filing jointly
  • $112,500 for heads of households
  • $75,000 for all other filers

For used vehicles, the list of requirements isn't too long:

  • You need to be buying the used EV from a dealer, not a private party.
  • Each vehicle can only claim the used credit once, so it can't have been sold for the used vehicle tax credit already
  • The vehicle needs to be at least two years old, and meet weight and battery size requirements (here is a list of qualifying vehicles)
  • The purchase price needs to be $25,000 or less.

The last might be the biggest challenge. According to Cox Automotive, prices for used EVs are coming down, but the average listing price last quarter was still $43,400.

But if you find a qualifying vehicle, you can get a tax credit worth 30% percent of the sale price, up to a cap of $4,000.

The Rivian R1S SUV, seen here, will not qualify for a tax credit for electric cars after changes to the rules. Even when it was eligible, a price cap requirement was a barrier for most purchasers: Only a bare-bones version of the premium electric SUV squeaked under the $80,000 price cap.

The Rivian R1S SUV, seen here, will not qualify for a tax credit for electric cars after changes to the rules. Even when it was eligible, a price cap requirement was a barrier for most purchasers: Only a bare-bones version of the premium electric SUV squeaked under the $80,000 price cap. / Getty Images

Want to lease? That's easy.

Leased vehicles qualify for a separate $7,500 tax credit with no restrictions on price, income or where the car was built.

There's one wrinkle: A tax credit for a leased vehicle goes to the leasing company, not directly to the driver, so make sure that your contract actually passes the discount along to you.

The tax credits will continue to change

These rules are still in flux in many ways, including:

  • Automakers are already scrambling to shift their supply chains to comply, so more cars might qualify over time ...
  • ... but every year, the required percentages get higher, and new restrictions on Chinese components will soon kick in too. So fewer cars might qualify.
  • Buyers will be able to get the credit as a discount at the dealership, instead of a credit on their own taxes, starting next year.
  • The way the IRS implements these rules could change. The current implementation has been criticized by some members of Congress, who think the Biden administration has added so much flexibility for automakers that it undermines the goal of the legislation.

Long story short: If you want to buy an EV in the future, you will have to confirm at the time you purchase the vehicle whether it qualifies.

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