Changes to the EV tax credit in 2024 allow an immediate discount on an EV purchase -- but there are additional requirements that shorten the list of eligible EVs.
Sam Becker is a freelance writer whose work has appeared in and on CNBC, Fortune, USA Today, Business Insider, and more. Sam is also the author of the growing finance and strategy-focused newsletter, "Not Pretty, Not Rich."
Effective this year, the changes may help steer more potential buyers toward EVs and away from gas-powered vehicles. "The tax credit -- most Americans still aren't aware of it," said Loren McDonald, CEO of the analyst firm EVAdoption. "That's why the point of sale [change] is important."
But as of early 2024, the changes are a bit of a mixed bag for consumers. While the changes do mean you can save money immediately on an EV purchase versus waiting for your tax return, it limits your EV options, too. Price caps, income requirements, dealership participation and battery sourcing requirements have caused the 2024 list of eligible EVs to shrink -- at least for now.
McDonald said that despite the stringent requirements, the EV market is still growing fast in the US, citing a 73% increase in EV sales for Mercedes last year; Tesla saw a 37.7% increase in sales, too. According to a recent CNET interview with the US Secretary of Energy, Jennifer Granholm, 1.4 million EVs were sold during 2023.
And while prices tend to be higher for EVs than for gas-powered cars, EV prices are falling. The average price for a new EV in December 2023 was almost $51,000, down almost 18% year-over-year, according to Kelley Blue Book data.
EV tax credit changes for 2024
The IRS updated its electric vehicle tax credit rules as of Jan. 1, which makes it easier to see immediate savings on an EV purchase. Practically speaking, buyers purchasing a new EV can claim a tax credit maxing out at $7,500, or $4,000 for a used car.
Perhaps the biggest and most important change is that EV buyers can now take advantage of that tax credit at the point of sale -- meaning you're effectively able to get up to a $7,500 discount at the dealership. Before the change, you would need to wait to see the benefits of that tax credit when you filed your taxes.
For example, if you purchased an EV in January 2022 and could qualify for the full $7,500 tax credit toward the purchase, you wouldn't see the benefit of that tax credit until you filed your taxes in April 2023 -- nearly a year and a half later. With this new change in effect, you can take the credit immediately, almost as if you have a $7,500 EV coupon, which may incentivize more buyers to choose an EV.
"The big thing that changed is that you have the ability to take the credit at the point of sale, and you're essentially transferring it to the dealership and they're getting reimbursed," said Ronald Montoya, senior consumer advice editor at the automotive-focused site Edmunds. "It's like a discount on the vehicle, as opposed to waiting until your taxes come up and taking it there."
Whether you can fully take advantage of the entire tax credit, however, is a bit more complicated.
2024 EV tax credits: The details of the new rules
There are now several things that prospective EV buyers must take into consideration when trying to determine if you can take advantage of the EV tax credit.
Price caps on eligible EVs, and specific types of EVs:SUVs and pickups, for instance, must have a manufacturer's suggested retail price of less than $80,000, or $55,000 for other vehicle types. If the MSRP is above that threshold, it doesn't qualify for the tax credit.
A buyer's income must also be below a certain threshold: Buyers may not be able to take the tax credit depending on a buyer's tax filing status and their modified adjusted gross income. For instance, an individual with a MAGI of more than $150,000 is ineligible, or joint tax returns with a MAGI of more than $300,000 are ineligible as well.
A dealership must be willing to work with a buyer to transfer the tax credit: If a buyer wants to utilize the $7,500 tax credit as an immediate effective discount on an eligible EV purchase at the point of sale, the dealership must be willing and able to accept the transfer of that tax credit from the consumer to itself, and then apply for reimbursement from the IRS. Not all dealerships are participating (dealerships can register with the IRS to get on board), and Montoya said that many may not even fully understand the finer points of the new rules.
"From a customer's perspective, it's become significantly more complicated," said Montoya, when people are trying to figure out whether they can utilize the EV tax credit. "Make sure you research this on your own before heading to the dealership. They may not be fully versed in the intricacies -- don't rely on their word, know the intricacies yourself."
Note, though, that the list is almost sure to change over time, as automakers get up to speed on new sourcing and manufacturing requirements. It's those requirements that mostly led to the winnowing of the list of eligible models down from more than 40 models in 2023 to less than 20 in 2024. And understanding the sourcing and manufacturing changes requires some context, too.
"Fundamentally it was a trade and manufacturing policy change. The US auto industry has fallen behind, except for Tesla," McDonald said. "The transition to EVs is the biggest disruption to the auto industry in 100 years."
Effectively, the US auto industry is late to the EV game -- manufacturers in other parts of the world, mostly Asia, fired up their EV research, development and manufacturing years ago, while many US automakers are only now getting caught up. As a result, almost all powertrains and batteries are manufactured in countries like China. As such, the change to sourcing requirements is designed to help the US catch up in terms of building batteries for EVs and other components, as well as onshoring assembly and manufacturing.
"The foundation of this is rewarding and incentivizing US and US-friendly companies to set up a battery supply chain in North America, so we can better compete with the Chinese and Asian companies," McDonald said.
The rubber meets the road: What it all means for EV buyers
Ultimately, this means a few things for prospective EV buyers hoping to take advantage of the tax credit:
An EV's final assembly must take place in North America (the US, Mexico or Canada).
At least 40% of the "critical minerals" in the EV's battery must have been extracted or processed in the US or a country that has a free trade agreement with the US. That percentage will increase in 10% increments every year up to 80% in 2027.
At least 50% of the EV's battery components must have been manufactured or assembled in the US or a country with a free trade agreement with the US. That percentage likewise increases incrementally up to 100% by 2029.
Combine these requirements with income thresholds, dealership participation and MSRP limitations, and it's easy to see why so few EVs currently qualify for the EV tax credit. But as automakers switch up their supply chains and manufacturing (again, the intent of the new rules) the list of eligible vehicles is expected to grow.