The Changing Rules for the Electric Vehicle Tax Credit

A picture taken on September 5, 2020 shows the front of a "Tesla Model Y" car, an all-electric compact SUV by US electric car giant Tesla, during its presentation at the Automobile Club in Budapest. Photo by ATTILA KISBENEDEK/AFP via Getty Images

By Kelley R. Taylor From Kiplinger’s Personal Finance

When the Inflation Reduction Act passed in 2022, it ushered in an electric vehicle tax credit worth up to $7,500.

This EV tax credit has caused some confusion ever since partly because of the rules on price limits as well as the manufacturing, sourcing and assembly of the vehicles.

The IRS released guidance late last year to help consumers know which EVs were eligible for the new credit. That guidance used a particular federal vehicle classification standard to determine whether a certain EV is a car or SUV. That distinction is important because under the new law, the tax credit manufacturer’s suggested retail price (MSRP) limit is different for cars than SUVs, vans, and pickup trucks. To be eligible for the EV credit, cars must have an MSRP under $55,000, while vans, pickup trucks and SUVs can’t have an MSRP of more than $80,000.

To address ongoing confusion around the rules, the Treasury Department and IRS recently leased new guidance. That guidance uses different criteria, based on the Environmental Protection Agency’s Fuel Economy Labeling Standard, to determine whether a vehicle is a car or SUV. That means that several crossover vehicles that were apparently ineligible for the EV credit last month are now eligible.

Additionally, the new guidance is retroactive to Jan. 1, 2023. So, if you took possession of your EV in January, you could use this guidance to see if you qualify for the credit.

The Tesla Model Y, Ford Mustang Mach-E and Cadillac Lyriq are examples of popular electric vehicles that now qualify as SUVs for purposes of the EV credit, according to the IRS.

However, it’s important to note that the credit guidance coming from the IRS can be complicated, so keep an eye on the IRS’s list of qualifying vehicles for 2023 and later. You can also search the vehicle identification number of the EV that you’re interested in on the Department of Energy’s Alternative Fuels Data Center website.

The vehicle classification changes come as some automakers, including Ford and Tesla, had already reduced prices on some EV models to make them eligible for the tax credit. (Some of those prices, such as the price of the Tesla Model Y, are reportedly inching back up.)

Still, there’s a lot of wrangling in Congress and in international circles over which electric vehicles should be eligible for the credit.

So what does all of this mean for you? The controversy surrounding the credit and the complicated rules for claiming it mean that new guidance will continue to flow from the government. For example, much anticipated guidance on manufacturing and sourcing requirements for the credit is expected in March. If you’re in the market for an EV and hope to claim the tax credit, stay tuned.

(Robert Frick is a senior editor at Kiplinger’s Personal Finance magazine. For more on this and similar money topics, visit Kiplinger.com.)

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