- Credit Can Now Be Applied to Down Payment
- But Far fewer vehicles eligible
As 2024 dawns it bring with it some big changes in the federal tax credit program for EVs and plug-in hybrids.
On the plus side, the tax credit – for those few vehicles that still qualify – can be transferred to the dealership and applied immediately and directly as all or part of a down payment as of Jan. 1.
[A 10-minute read]
On the negative side, tough new rules about where battery materials can and can’t come from have stripped tax credit eligibility from some of the vehicles that were eligible in 2023 and have made it more difficult for new EVs and PHEVs to gain eligibility.
The best count as 2024 gets under way is that just 14 EVs and PHEV models retain tax credit eligibility. That’s out of some 80 models in the market today. More will be added to the list as supply chains are altered and new models are introduced, but the number of eligible vehicles is expected to remain fairly low throughout the year.
As in the past, motorists who lease an EV or PHEV don’t have to meet any of the income, price cap or place-of-origin rules because the IRS has ruled that leased clean vehicles are commercial vehicles, exempted from those restrictions.
[Note: The original version of this article was posted in December, 2023, but was deleted and replaced with this updated article on Feb. 1, 2024.]
What Changed?
The basic rules that have been in effect since the new tax credit program spelled out in the Inflation Reduction Act kicked in at beginning of 2023 are still with us. But a new, overriding determiner of tax credit eligibility began with the new year.
It’s the Foreign Entities of Concern rule and it says that, as of the start of 2024, if any component of an EV or PHEV battery comes from one of those proscribed places, then that vehicle is not eligible for any federal tax credit – even if it meets all the other criteria and was eligible in 2023.
The tax credit rules were rewritten in 2022 to encourage development of a North American-based clean vehicle supply chain and to reduce dependence on foreign sources of materials.
Those new rules spurred a lot of new EV and battery plant development in North America – much of it in the U.S. – but those factories take several years to build and most won’t be fully on line until 2025.
What Are Entities of Concern?
For purposes of the automotive segment, the foreign countries of concern are China, Russia, North Korea and Iran. China presently is the source of a majority of battery components and minerals.
A 25% or greater ownership stake by one of those countries or even by a citizen of one of those countries can trigger a foreign entities exclusion.
The new rule applies to EVs and PHEVs delivered on and after Jan. 1.
Even A Little Bit Counts
The rules drawn up as part of the Inflation Reduction Act not only set income eligibility limits for buyers and price limits for vehicles, but established battery content limits involving both critical mineral and general component content. The rules also required North American manufacture of the vehicle and set place-of-manufacture and place-of-origin limits on battery minerals and components.
The new, overriding foreign entities restrictions inthe 2024 EV tax credit rules take place in two stages. Starting this year, vehicles with batteries containing any components sourced from one or more of the entities of concern are excluded. In 2025, the exclusion expands to cover any vehicle with any battery minerals extracted, processed, or recycled by a foreign entity of concern.
It doesn’t have to be much to be a problem.
General Motors recently announced that because they have batteries with cells that contain electrolytes and separator membranes provided by an entity of concern (likely China or Chinese controlled), both the 2024 Chevrolet Blazer EV and the Cadillac Lyriq lost their tax credit eligibility for vehicles delivered on or after Jan. 1.
GM said that it is making arrangements to source those components from an approved source and expects the two models to regain tax credit eligibility early in 2024.
Meantime, the Chevrolet and Cadillac divisions have said that they will provide the equivalent of the tax credit for buyers of vehicles ruled ineligible under the new rules.
Two new EVs that GM has yet to start delivering to retail customers – the Silverado EV pickup and Equinox EV crossover – are expected to have full $7,500 tax credit eligibility but are not yet shown on the IRS list. Equinox EV deliveries are slated to begin this quarter with Silverado EV deliveries following in the summer.
Ford’s Mustang Mach-E, Lincoln Aviator Grand Touring PHEV and Ford E-Transit commercial delivery lost their tax credit eligibility, as did Nissan’s Leaf.
Tesla also said that it has been affected, with rear-wheel drive and Long Range versions of the Model 3 losing eligibility because of battery components from China. Some variants of the Model Y may also be affected, the company has said.
Other Ford, GM and Tesla EVs and PHEVs, however, retain tax credit eligibility because their battery components all come from approved sources.
General Motors recently announced that because they have batteries with cells that contain electrolytes and separator membranes provided by an entity of concern (likely China or Chinese controlled), both the 2024 Chevrolet Blazer EV and the Cadillac Lyriq lost their tax credit eligibility for vehicles delivered on or after Jan. 1.
GM said that it is making arrangements to source those components from an approved source and expects the two models to regain tax credit eligibility later in the year.
Meantime, the Chevrolet and Cadillac divisions have said that they will provide the equivalent of the tax credit for buyers of vehicles ruled ineligible under the new rules.
Two new EVs that GM has yet to start delivering to retail customers – the Silverado EV pickup and Equinox EV crossover – are expected to have full $7,500 tax credit eligibility but are not yet shown on the IRS list. Equinox EV deliveries are slated to begin this quarter with Silverado EV deliveries following in the summer.
Ford’s Mustang Mach-E, Lincoln Aviator Grand Touring PHEV and Ford E-Transit commercial delivery lost their tax credit eligibility, as did Nissan’s Leaf.
Tesla also said that it has been affected, with rear-wheel drive and Long Range versions of the Model 3 losing eligibility because of battery components from China. Some variants of the Model Y may also be affected, the company has said.
Other Ford, GM and Tesla EVs and PHEVs, however, retain tax credit eligibility because their battery components all come from approved sources.
What’s Eligible Now?
As 2024 begins, the eligibility list published by the IRS is fairly brief:
- Chevrolet Bolt EV, 2022 and 2023 model years, $7,500*
- Chevrolet Bolt EUV, ’22 and ’23 MY, $7,500*
- Chrysler Pacifica PHEV, 2022-2024 MY, $7,500
- Ford F-150 Lightning, standard range and extended range, 2022-2024 MY$7,500
- Tesla Model 3 Performance, ’23-’24 MY, $7,500
- Tesla Model X Long Range, ’23-’24 MY, $7,500
- Tesla Model Y AWD and Performance, ’23-’24 MY, and RWD, ’24 MY only, $7,500
- Ford Escape PHEV, ’22-’24 MY, $3,750
- Jeep Wrangler 4xe PHEV, ’22-’24 MY $3,750
- Jeep Grand Cherokee 4xe PHEV,’22-’24 MY, $3,750
- Lincoln Corsair Grand Touring PHEV,’ ’22-24 MY, $3,750
- Rivian R1S, dual- and quad-motor with large battery, ’23 and ’24 MY, $3,750
- Rivian R1T, dual- and quad with large battery and dual with max battery, ’23 and ’24 MY,$3,750
- Volkswagen ID.4, all ’24 models and ’23 models with SK On batteries (battery maker is listed on window sticker), $7,500.
* Bolt production ended in December 2023, but there still are new 2023 models available. GM has said that a revised Bolt will hit the market at an unspecified future date.
Applying the Tax Credit
If you are lucky enough to be shopping for an EV or PHEV that still will be eligible under the 2024 EV tax credit rules, and you can meet the income requirement, you may be able to apply the tax credit directly against the purchase price rather than waiting, as in past years, to deduct it from your federal income tax bill.
Under the new rules, dealers who register with the IRS – and most plug-in vehicle sellers are signing up – can accept a transfer of the credit from the purchaser.
The vehicle still has to meet price cap rules, $80,000 maximum MSRP for pickups, vans and SUVs and $55,000 for passenger cars. And buyers must attest that their annual incomes won’t exceed the limits of $150,000 for single filers, $300,000 for joint filers and $225,000 for head-of household filers.
If you are bad at guessing what your annual adjusted gross income will be – or it you just plain cheat and understate it – the IRS will come after you to refund the credit when you file your taxes at the end of the year. It has said it won’t seek refunds from dealers who accepted a buyer’s statement of income in good faith.
The tax credit doesn’t have to be transferred to the dealer – consumers can continue to claim it at tax time – but for those who do transfer and use it it time of purchase the IRS rules require that they obtain a “time of sale” report from the dealership and file it with their annual income tax return.
Battery Components Requirement
For a vehicle to be eligible for a $3,750 credit – half of what originally was a flat $7,500 credit – a certain percentage of its battery components, by value, must have been manufactured or assembled in North America. That percentage was 50% in 2023 and it escalates through 2029.
- For this year and 2025, the applicable percentage is 60%
- For 2026 it increases to 70%
- For 2027 it is 80%
- For 2028 it’s 90
- And it is 100% for 2029 and after.
Critical Minerals Requirement
To be eligible for a separate $3,750 credit, a certain percentage, by value, of the critical minerals contained in the vehicle’s battery must have been extracted or processed in the United States or a country with which the United States has a free trade agreement (there are 22 as of now) , or be recycled in North America. For 2023, the applicable percentage was 40%.
- For 2024, the applicable percentage is 50%
- For 2025 it is 60%
- For 2026, 70%
- And beginning in 2027, it is 80%.
Vehicles meeting all tax credit rules for battery components and minerals are eligible for a $7,500 credit.
Price Caps
But eligible vehicles cannot exceed a price cap – the manufacturer’s suggested retail price including the cost of equipment added before the vehicle is delivered to the dealership – of $55,000 for passenger cars or $80,000 for pickups, vans and SUVs. It is the MSRP, not the actual sales price, that determines eligibility.
Income Caps
Purchasers of new clean vehicles cannot qualify for a federal tax credit if their modified adjusted gross annual incomes exceeds certain limits (for the tax credit, the IRS defines modified AGI as the amount on line 11 of the Form 1040 Tax return plus any foreign income including income from sources in Puerto Rico and American Samoa):
- $150,000 for single filers
- $225,000 for head-of-household filers
- $300,000 for joint filers.
Leased Clean Vehicles
Clean vehicles that are leased fall under commercial vehicle rules and are exempt from the price, income, battery source and place-of-assembly requirements. That means owners of those vehicles – typically the automakers’ and dealers’ leasing arms – can claim the tax credit and, if they choose to, can pass it on to consumers who lease the vehicles from them. So EVs, fuel-cell vehicles and PHEVs built in places such as Germany, Japan and South Korea are eligible if they are leased to consumers, but not if the consumer chooses to purchase them.
Tax Credit for Used Clean Vehicles
For used clean vehicles, the tax credit is figured at 30% of the sales price up to a maximum credit of $4,000. The vhicle’s sales price cannot exceed $25,000 before taxes and title and registration fees.
Income caps for buyers are:
- $150,000 for married filing jointly or a surviving spouse
- $112,500 for heads of households
- $75,000 for all other filers.
Sales prices for eligible used vehicles cannot exceed $25,000 and the vehicle must be at least two model years older than the calendar year in which it is purchased (a used vehicle bought in 2024 can be no newer than a 2022 model).
Used clean vehicles also must be purchased from a dealer – not an individual – to be eligible, and, except for fuel cell vehicles, must have been made by a qualified manufacturer. The IRS maintains an on-line list of qualified manufacturers and their eligible used models. Battery and place of manufacturer requirements don’t apply to used clean vehicles.
Used vehicle buyers can claim the credit once every three years.