When the Inflation Reduction Act (IRA) was passed last year, it ushered in an up to $7,500 tax credit for some EVs (also called “clean vehicles”). That EV tax credit, while generally welcomed by some consumers and lawmakers, has caused confusion, in part because of new rules surrounding electric vehicle price limits, and for manufacturing, sourcing, and assembly that make some vehicles ineligible for the credit. So, there are ongoing questions about which vehicles qualify and whether certain electric vehicle models are considered cars or SUVs for purposes of the tax credit.
SUV Versus Car: EV Price Limits
At the end of 2022, the IRS released guidance to help consumers determine which EVs were eligible for the new tax credit. That guidance used a particular federal vehicle classification standard to determine whether a certain electric vehicle is a car or a SUV. That distinction is important because under the Inflation Reduction Act (IRA), the EV tax credit manufacturer’s suggested retail price (MSRP) limit is different for cars as opposed to SUV, vans, and pickup trucks. To be eligible for the EV tax credit, cars must have an MSRP under $55,000, while eligible vans, pickup trucks, and SUVs can’t have an MSRP of more than $80,000.
To address ongoing confusion around vehicle classifications and price limits, the Treasury Department and the IRS released new guidance last week. That guidance uses different criteria, based on the Environmental Protection Agency’s (EPA) Fuel Economy Labeling Standard, to determine whether a vehicle is a car or a SUV. For automakers and consumers, that essentially means that several crossover vehicles that were apparently ineligible for the EV tax credit last month, are now eligible.
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Additionally, the new guidance is retroactive to January 1, 2023. So, if you took possession of your EV in January of this year, you can use this guidance to determine whether the vehicle you purchased is eligible for the tax credit.
Does Tesla Model Y Qualify for the EV Tax 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 tax credit, according to the IRS.
However, it’s important to note that the guidance coming from the agency on the 2023 EV tax credit can be complicated, so if you are in the market for an EV, and want to claim the credit, keep an eye on the IRS’ list of qualifying vehicles for 2023 and after. You can also search the vehicle identification number (VIN) of the EV that you’re interested in on the Department of Energy's Alternative Fuels Data Center website.
The IRS has also updated its frequently asked questions fact sheet on the EV tax credit.
EV Tax Credit Concerns
The vehicle classification changes come as some industry automakers, including Ford and Tesla, had already reduced prices on some of their electric vehicle models to make them eligible for the tax credit. (Some of those prices, e.g., like the price of the Tesla Model Y, are reportedly inching back up.) And while making more EVs eligible for the credit is mostly good news for some consumers, there’s still a lot of wrangling in Congress, and in international circles, over which electric vehicles should be eligible for the tax credit, and why.
For example, South Korea, the EU, and Sweden have expressed concerns about the final assembly requirements in the Inflation Reduction Act. And Sen. Joe Manchin (D-WV), who was a proponent of the Inflation Reduction Act, recently proposed legislation to halt implementation of the EV tax credit. Manchin’s view is that the IRS is making the full $7,500 tax credit available for vehicles and manufacturers that haven’t met all of the requirements in the Inflation Reduction Act.
So what does all of this mean for you? The controversy surrounding the new EV tax credit and the increasingly complicated rules for claiming the EV credit, mean that new information will continue to flow from the Treasury Department and the IRS. For example, much anticipated guidance on manufacturing and sourcing requirements for the credit is expected in March. So, if you’re in the market for an EV and hope to claim the tax credit, stay tuned.
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