Tougher EV tax credit regulations in the US announced, to come into effect on April 18

The US Treasury Department has announced tougher regulations on tax credits for electric vehicles (EVs) which will reduce or eliminate the incentives on many models in April.

Since January many EVs, including all variants of the Tesla Model 3 and Model Y, have qualified for the full $7,500 tax credit that came about as a result of the Inflation Reduction Act (IRA) introduced last year. Those credits were only going to be in affect for a few months as the IRS said newer rules that took into account where the EV batteries were sourced and manufactured would be announced in March.

Those new regulations were announced today, but they won’t go into effect until April 18, 2023.

To be eligible for the full tax credit of $7,500, EVs need to satisfy two sets of criteria. If a vehicle only meets one of these two requirements, it is eligible for a $3,750 tax credit.

The first set of criteria specifies that at least 50% of the value of the battery components must be produced or manufactured in North America in the fiscal year 2023, and this minimum percentage will increase annually.

The second set of criteria requires that at least 40% of the value of critical minerals used for the vehicle, including cobalt, copper, nickel, graphite, and lithium, must be extracted, processed, and/or recycled domestically or in a country with which the U.S. has a free trade agreement. This minimum percentage will also increase annually.

The annual increases for both sets of criteria can be seen in the chart below.

By April 18 the government will publish a revised list of qualifying models and tax credit amounts, giving EV buyers an additional two weeks before the new requirements come into effect.

However, Tesla is already notifying potential buyers on its website that it expects the Model 3 Rear-Wheel Drive (RWD) will no longer be eligible for the full tax credit come April 18, with an updated message on the Design Studio which reads,

“New Model 3 and Model Y vehicles qualify for a federal tax credit for eligible buyers. Based on new IRS guidance, the $7,500 credit is now anticipated to be reduced for Model 3 Rear-Wheel Drive on April 18.”

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