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EV Tax Credit: 2024 Changes, How It Works, Eligible EVs

A federal EV tax credit can make buying or leasing an electric vehicle significantly more affordable. Unlike a manufacturer incentive, your ability to claim the Clean Vehicle Tax Credit may depend on your tax situation. To complicate matters, recent changes have excluded a slew of electric cars and plug-in hybrids in 2024.

Even if a vehicle is eligible for the electric car tax credit, not every automaker passes it along in the same way. The EV tax credit amount can also vary depending on the model and how the battery was manufactured. Here, we'll try to explain some of the key tax credit changes and what they could mean for new car buyers.

Updated on March 15th, 2024

EVs Eligible For The Tax Credit

Tesla Model Y SUV blue color front view

To qualify for the tax credit, you'll need to purchase an eligible new vehicle and not exceed the program's income caps.

Based on IRS data on the EPA's official website, there are currently 20 vehicles eligible for a tax credit, and only 11 qualify for the full amount of $7,500 when purchased. In some cases, there are EVs like the Ford Mustang Mach-E that are completely ineligible for the tax credit.

As of January 1st, 2024, dealers can offer the tax credit as an upfront discount to eligible buyers. This can reduce your price at the time of purchase rather than having to wait until the following year when you file your taxes. This is a major change that could simplify buying an EV.

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EVs That Qualify For A $7,500 Tax Credit

2023 Volkswagen ID.4 EV blue color rear view

11 vehicles qualify for the full $7,500 tax credit when purchased based on the latest IRS data.

Make/Model EV Type Vehicle Type
Cadillac LYRIQ Electric Vehicle SUV
Chevrolet Blazer EV Electric Vehicle SUV
Chevrolet Bolt EV Electric Vehicle Hatchback
Chevrolet Bolt EUV Electric Vehicle SUV
Chrysler Pacifica Plug-In Hybrid Minivan
Honda Prologue Electric Vehicle SUV
Ford F-150 Lightning Electric Vehicle Truck
Tesla Model 3 Electric Vehicle Sedan
Tesla Model X Electric Vehicle SUV
Tesla Model Y Electric Vehicle SUV
Volkswagen ID.4 Electric Vehicle SUV

Although the list of EVs that qualify for the tax credit is short, a loophole enables a considerably wider range of vehicles to qualify for up to a $7,500 commercial credit. That incentive is available when leasing and goes to the leasing company (i.e. Ford Credit, Toyota Financial, etc.).

In many cases, the lender can pass that savings along to consumers in the form of lease cash. So while it may be discouraging to have such limited options when buying your EV, the fact is that many EVs and plug-in hybrids can offer substantial savings when they're leased instead.

As of this writing, the Model 3 tax credit is limited to the 2023 model year Model 3 Performance model only. The revamped 2024 Tesla Model 3 sedan does not qualify for the tax credit. In the case of the Tesla Model X SUV, only the entry-level Long Range configuration qualifies.

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EVs That Qualify For A $3,750 Tax Credit

Rivian R1S electric SUV rear view

9 vehicles are eligible for a $3,750 tax credit.

While some of these may have qualified for the full $7,500 incentive in the past, that is no longer the case based on the latest IRS guidelines.

Make/Model EV Type Vehicle Type
Audi Q5 Plug-In Hybrid SUV
Ford Escape Plug-In Hybrid SUV
Jeep Grand Cherokee 4xe Plug-In Hybrid SUV
Jeep Wrangler 4xe Plug-In Hybrid SUV
Lincoln Corsair Plug-In Hybrid SUV
Ford F-150 Lightning Electric Vehicle Truck
Nissan LEAF Electric Vehicle Hatchback
Rivian R1T Electric Vehicle Truck
Rivian R1S Electric Vehicle SUV

This list used to include the Ford Mustang Mach-E until January 2024. However, that vehicle lost its eligibility due to updated sourcing requirements stemming from the Inflation Reduction Act. At this time, it's unclear if the Ford Mustang Mach-E tax credit will return in any capacity.

Here are some other EVs that remain ineligible for any credit:

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EV Tax Credit Income Cap

2024 Hyundai Kona EV yellow color SUV

According to the IRS, the income caps for the EV tax credit are as follows:

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

Not sure which bucket you fall in? Your tax advisor will be able to help you understand whether or not you and your family can take advantage of this incentive. Be sure to keep in mind that the EV tax credit isn't like a normal car rebate and that you'll need to disclose it with supporting documents when you file your taxes.

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EV Tax Credit MSRP Cap

Lucid Air electric sedan

There is currently a $55,000 MSRP cap on electric cars, with a larger $80,000 price cap on trucks and SUVs. The IRS says that the MSRP does not include the destination charge, options "not physically attached to the vehicle," or applicable taxes & fees.

The EV tax credit MSRP cap can easily disqualify cars that meet other criteria. For example, even though the all-electric Lucid Air is built in North America, its high price tag of over $90,000 makes it ineligible for the tax credit when it is bought by a consumer.

MSRP refers to the Manufacturer's Suggested Retail Price. While dealers can sell cars at prices based on supply and demand, the EV tax credit is based on the MSRP. Buyers should keep this in mind on any EVs that have been significantly discounted.

It's important to keep in mind that you may be able to circumvent the MSRP cap when leasing. This is how brands like Tesla can take advantage of the leasing loophole to offer a $7,500 credit on vehicles like the Model X that you can't get on a purchase.

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Final Assembly Requirement

Hyundai IONIQ 5 EV SUV side view

When the Inflation Reduction Act was signed into law, the EV tax credit became limited to vehicles assembled in North America. That includes the United States, Canada, and Mexico. As a result, vehicles like the Hyundai IONIQ 5 lost their eligibility for the tax credit since they were built overseas.

Like the MSRP cap, you may be able to get around this by leasing. For example, Hyundai's biggest IONIQ 5 discount reached as much as $15,000 off MSRP thanks to the leasing loophole. In a more extreme case, the Japan-built Lexus RZ featured up to a $20,000 lease incentive in Colorado.

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Critical Minerals & Battery Requirement

2024 Tesla Model 3 Highland EV sedan

To get the full $7,500 tax credit on purchases, EVs and plug-in vehicles must meet both the critical minerals requirement and battery component requirements of the Inflation Reduction Act. If an EV only satisfies one of them, it may only be eligible for a $3,750 tax credit for cars delivered on or after April 18, 2023.

The domestic battery requirement on EVs prohibits sourcing components from "foreign entities of concern." This includes countries like China and Russia. After a brief pause, Volkswagen was able to confirm that its ID.4 crossover qualifies for the full tax credit when using batteries sourced by the company SK On.

In another case, the 2024 Rivian R1T had its $7,500 tax credit reduced to $3,750. Similarly, the 2024 Tesla Model 3 lost the tax credit completely. Automakers can make changes in how they source their EV components. In the coming years, Kia is expected to significantly boost manufacturing in the United States.

Here, too, you may be able to bypass this rule with the leasing loophole. Now that Rivian offers R1T leasing, the company debuted deals with a $7,500 lease credit. Some companies call this a Clean Vehicle Credit. If you aren't sure whether your price includes the incentive, we strongly suggest asking your dealer.

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Upfront EV Tax Credit

2023 Chevrolet Bolt EV hatchback side profile

Dealerships can now offer the federal EV tax credit upfront to consumers. Unlike previous iterations of the tax credit, this could make the buying process more straightforward and enable consumers to secure immediate savings rather than having to wait until they file their taxes.

To do this, the IRS states the Clean Vehicle Tax Credit will need to first be "initiated and approved at the time of sale." Participating car dealers will need to submit a "time-of-sale" report through an online IRS tool within 3 days of the sale. Dealers will then be able to be fully reimbursed.

If you're eligible for the full $7,500 on an eligible EV, the IRS says it can be provided to buyers "in the form of cash, down payment or partial payment for the purchase of the vehicle." However, be sure you qualify for the Clean Vehicle Tax Credit because you may have to repay it.

If you transfer the credit but exceed the program's income limit, the agency says "the buyer must repay to the IRS the full amount of any transferred credit when they file their tax return." If you do transfer the credit, the IRS recommends keeping a copy of the time-of-sale report as you'll need it when you file your taxes.

The IRS has a handy PDF fact sheet that outlines the process.

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Tax Credit: Lease vs. Purchase

Toyota RAV4 Prime red color plug-in hybrid

In most cases, EVs can be significantly better to lease than buy because of the leasing loophole. In our view, the biggest advantages are that you can secure the savings upfront and circumvent many of the restrictive requirements of the Inflation Reduction Act.

Manufacturers have geared incentives with this in mind. For example, the Toyota RAV4 Prime isn't eligible for a tax credit when you buy it but does offer a $6,500 incentive when leased. Committed to long-term ownership? You may be able to do a lease buyout.

Not all EVs offer lease buyouts, however. For example, the Tesla Model 3 doesn't have a purchase option on leases. Once your lease contract is up, this means that you'll have no choice but to return the car to Tesla. For most consumers, this may not be a big deal.

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Used EV Tax Credit

BMW i3

Used EVs priced $25,000 or less are eligible for a $4,000 tax credit or 30% of the sales price, whichever is lower. Section 25E of the Inflation Reduction Act text also says that a car must be at least 2 model years older than the year in which you bought it.

Interestingly, the used car tax credit on EVs is also limited to transactions made through a licensed dealership. That could potentially dash the hopes of frugal buyers looking to pay lower prices by going through a private party seller instead of a retailer.

The income cap for used EVs is lower than that of new ones at $75,000 for individuals, $112,500 for heads of households, and $150,000 for joint filers. These amounts are half that of the maximum income allowed when choosing a new EV or plug-in.

Thinking of buying a used EV? Used EV resale values have been highly volatile recently. As a result, you may find a big range in used EV prices. This is the result of heavy competition in the new car market and a mix of manufacturer incentives and price cuts.

Explore Used EVs Under $25,000

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Can The Federal Tax Credit Be Stacked With State EV Incentives?

BMW iX electric SUV rear view

In some cases, there may be state incentives that can sweeten the deal on an EV. For example, the Colorado Innovative Motor Vehicle Credit offers up to a $5,000 tax credit on qualifying vehicles. The best part is that Coloradoans can combine the incentive with the federal tax credit for up to $12,500 in savings.

As with the federal tax credit, buyers should ensure they understand the unique eligibility rules of these programs. In Colorado, the EV tax credit has an income cap as well as a price cap. Fortunately, recent changes in 2024 allow for even greater savings on the most affordable EVs that are priced under $35,000.

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Are Hybrids Eligible For Federal Tax Credits?

2024 Lexus TX SUV

Even though hybrids are greener than internal combustion engines, they are not eligible for the federal EV tax credit. The exception is for qualifying plug-in hybrids. Like hybrids, these use gasoline but use a larger electric motor and battery to enable PHEVs to travel longer distances purely on electric power.

While hybrid cars can certainly be appealing, incentives can make plug-in hybrids more affordable. For example, the 2024 Lexus TX 550h+ is a plug-in hybrid eligible for a $7,500 lease incentive. Given that the plug-in is $5,400 more expensive than the TX Hybrid, the PHEV may be a much better deal.

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Alex has been writing about car buying and leasing for over a decade. Originally from San Francisco, Alex has a degree in History from the University of California, Santa Barbara, and has been a lifelong lover of cars. Alex’s work has been featured in publications such as Forbes, The Wall Street Journal, Motor Trend, and more.

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