As you consider your next electric vehicle purchase, a major change to the popular $7,500 EV tax credit will impact eligibility for about 70% of previously qualifying models. The recently passed Inflation Reduction Act aims to promote domestic manufacturing by adding stringent assembly and sourcing requirements to qualify for the incentive. This means around 50 of the 72 electric cars, trucks, and SUVs once eligible will lose access.
While brands like Tesla, GM, and Ford build their EVs in the United States and should retain the credit, foreign automakers that import like Toyota, Hyundai, and Porsche will not qualify. This drastic change certainly affects your options as you shop. But it is also designed to spur automakers to shift production to North America long term.
Let‘s take a deeper look at why the changes are occurring, exactly which vehicles will lose eligibility, impacts for recent buyers, and the future of the EV industry under the revised tax credit rules. I‘ll make sure to dig into all the key details you‘ll need to make an informed electric vehicle purchase.
Background on the Federal EV Tax Credit
As an EV enthusiast, you likely know the EV tax credit well. But as a quick recap, the incentive allows buyers to reduce their tax bill dollar-for-dollar by up to $7,500 when filing their taxes for the year they purchased the vehicle. This major perk has been boosting electric vehicle purchases in the United States since 2009.
Initially the credits phased out once an automaker sold 200,000 qualifying vehicles. Tesla and GM hit the cap years ago. But under the Inflation Reduction Act, unlimited credits are once again available if specific domestic assembly and sourcing rules are met.
Over 2 million Americans have benefited from the credit already. By spurring demand, it has prompted automakers to invest over $100 billion in electrification in just the last couple years according to ACT Research. Clearly, access to credits strongly influences sales and manufacturing decisions.
Details on the Inflation Reduction Act
The sweeping Inflation Reduction Act signed into law by President Biden in August 2022 aims to combat rising prices, reform healthcare, lower energy costs, and promote clean energy manufacturing. Within the massive $737 billion package lies a revamp of the beloved EV tax credit.
While the new rules allow EV leaders Tesla and GM credits again, making up to $7,500 available to all buyers, it also imposes strict sourcing and assembly requirements. At least 50% (rising over time) of battery components must come from the US or free trade partners. And final vehicle assembly must occur in North America.
These provisions shut out imported electric vehicles – causing the expected 70% loss of eligibility. Price caps have also been newly implemented – $55,000 for cars or $80,000 for trucks and SUVs. And individual income caps limit the credit to those making under $150,000 annually on single returns or $300,000 jointly.
Analysis of the 70% Estimate
According to industry research firm BloombergNEF, over 70% of the 72 battery electric and plug-in hybrid vehicles previously meeting program requirements will lose eligibility once the bill takes effect. Why such a high percentage?
Firstly, the final assembly requirement bars all overseas imports – and many major foreign automakers like Toyota, Volkswagen, and Hyundai currently build all EVs abroad. BloombergNEF expects just 19 of 67 pure electric models to qualify versus 55 prior to the act.
Additionally, new price caps exclude expensive EVs like the Lucid Air Dream Edition and Mercedes EQS. And the battery component and critical mineral sourcing requirements grow stricter over time – forcing tough new production decisions.
Here is a breakdown of qualifying vehicles prior to the act versus expected after:
| Vehicle Type | Qualifying Pre-IRA | Qualifying Post-IRA | % Change |
|---|---|---|---|
| Pure Electric | 55 | 19 | -65% |
| Plug-In Hybrid | 17 | 4 | -76% |
| Total | 72 | 23 | -68% |
This data matches well with expectations of around a 70% reduction. Next let‘s explore specifics on the new eligibility rules and why they take such a big bite.
The New Eligibility Requirements
The Inflation Reduction Act adds strict new stipulations to access the maximum $7,500 credit:
1. Assembly Location
Final assembly of the vehicle must occur in North America. This instantly excludes imported vehicles from eligibility. While some automakers already manufacture regionally like Tesla in California, Ford in Michigan, and Honda in Ohio – many companies lacking US plants will need to shift production or lose credits.
2. Battery Component & Mineral Sourcing
Lithium-ion battery pack components must meet rising percentages sourced from the US or countries with US free trade agreements:
- 40% in 2023
- 50% in 2024
- 60% in 2025
- 70% in 2026
- 80% in 2027
- 100% from 2028 onward
Additionally, a portion of battery critical minerals like lithium, cobalt, and manganese must originate from or be processed in the US or partner nations. These phased requirements aim to establish a stable domestic EV supply chain.
3. Vehicle Price Caps
To remain affordable to individual owners, vehicles must carry manufacturer suggested retail prices (MSRP with destination charges) under set limits:
- $55,000 for cars/wagons
- $80,000 for pickup trucks, SUVs, and vans
4. Individual Income Caps
To access credits, individual tax filers must fall below the following adjusted gross annual income limits:
- $150,000 for single or married filing separately
- $225,000 for head of household
- $300,000 for joint filers
These strict new bounds aim to spur domestic manufacturing while keeping EVs attainable for regular Americans. But they also instantly disqualify many models and makers.
Analysis of Automakers Losing the Credit
With the stringent requirements taking effect immediately once signed into law in August 2022, many automakers across the industry will no longer offer vehicles qualifying for the $7,500 tax credit. Here is a high level view:
Toyota
Pre-IRA Credits: Yes, for models like the Rav4 Prime and bZ4X BEV
Post-IRA Credits: No credits across lineup
Summary: Lacks US assembly currently, primed to lose eligibility
Hyundai/Kia
Pre-IRA Credits: Yes, for models like Ioniq 5 and EV6
Post-IRA Credits: No credits across lineup
Summary: Imported models set to lose eligibility
Porsche
Pre-IRA Credits: Yes, for Taycan and Cross Turismo
Post-IRA Credits: No credits across lineup
Summary: European import loses eligibility
This pattern continues across other import-reliant automakers too – expect loss of credits industry-wide for Volkswagen, Polestar, Mazda, Subaru, and more. Companies focused on US production retain or expand access however.
Automakers Retaining Eligibility
Some automakers with sizable existing US manufacturing footprints will continue offering credits across large portions of their lineups:
Tesla
Pre-IRA Credits: Phased out previously
Post-IRA Credits: Models 3, Y, and future Cybertruck likely eligible
Summary: Market leader regains credits with American factories
General Motors
Pre-IRA Credits: Phased out previously
Post-IRA Credits: Electric Hummer, Lyriq, and more eligible
Summary: Expands credits again with US-made EVs
Ford
Pre-IRA Credits: Yes, for Mach-E and E-Transit
Post-IRA Credits: Expands credits to F150 Lightning and other US-built models
Summary: Doubles down on American manufacturing
The Detroit automakers are primed to leverage existing US plants to retain and expand credit access. Meanwhile the Imports lose out until more local production comes online.
Tax Credit Loophole Opportunities
While the majority of imported electric vehicles look set to lose qualification across model lineups, some loopholes exist:
Existing Orders – Consumers with either a greater than 5% non-refundable deposit or a purchase agreement in place prior to August 16th, 2022 remain eligible for the $7,500 credit under the old rules even if the vehicle now fails new requirements.
Overseas Then Domestic Manufacturing – Automakers may initially import vehicles but have the option to shift assembly to the US before the next model year. The VIN identifier labels location of final manufacture so credits could be unavailable initially then restored down the line.
These factors could enable consumers who move quickly to order or put down a sizeable deposit to get one last EV purchase in under the old regulations. For automakers the opportunity exists to take advantage of credits again by moving production, even if temporary pain occurs first. The key takeaway? All is not lost completely for Imports or consumers with flexibility and patience.
Impacts for Recent EV Buyers
For those who already completed purchases of newly ineligible vehicles in 2022 prior to August 16th unfortunately no provisions exist to retroactively claim the credit. The IRS views the incentive as going forward based on date of purchase with the vehicle requirements in place at that time.
So while you cannot recoup anything after the fact if your car no longer qualifies, you can still take advantage this year if you:
- Rush to buy before January 1st, 2023 when requirements phase in
- Put down 5%+ non-refundable deposits before taking delivery
There are no free passes for those already caught in process, but the above options exist to "get grandfathered in" before the deadline hits.
Future Impacts – Forced Manufacturing Shifts
While the Inflation Reduction Act‘s adjustments cause acute pain for import-reliant automakers and consumers now, the goals are strategic. Limiting credits to North American-made EVs provides potent motivation for manufacturers to localize production long term.
We are already seeing industry commitments to large manufacturing investments materialize:
- Hyundai fast-tracking US EV and battery factories worth $10B+
- Toyota partnering with Panasonic on US battery production
- Honda investing $4.4B in American facilities
- VW spending $7B+ on an EV plant in Tennessee
Combine these with Ford‘s massive Blue Oval City campus in Tennessee, GM‘s Ohio battery plants, and Tesla‘s exponential Austin and Berlin gigafactories – and we see an explosion of US electric vehicle and battery supply capability on the horizon.
While the consumer side feels limiting presently, the IRA should stimulate enough activity to drastically improve domestic lineups within the next 3-5 years.
The Future Looks Bright
In summary – the landmark Inflation Reduction Act makes huge strides to reshape EV tax credits towards benefiting American manufacturing and supply chains long term. This aims to nurture US technical leadership in electrification.
The painful eligibility losses in the immediate couple years for imported models will no doubt frustrate some shoppers. But by pushing more production stateside, policymakers are playing chess – not checkers. Their move should pay dividends down the road as next generation clean transport increasingly says "Made in America".
So while finding your perfect EV match poses fresh challenges, domestic options will only continue improving in reliability, performance, styling, and value. The future of sustainable mobility looks bright here at home thanks to the vision laid out in this transformative legislation.
I hope breaking down all the fine print around the changing tax credit gives you confidence navigating your next electric vehicle purchase or lease! Reach out with any other questions.
