Electric vehicle (EV) incentives: What you need to know

Updated

A Tesla charging at a public EV charger
EV Incentives can drop the cost of your EV by thousands of dollars. Image source: InsideEVs

As a relatively new technology, electric vehicles (EVs) tend to be more expensive than gas-powered cars. The higher price tag can discourage many car buyers. This is where EV incentives come in. Incentives can lower the upfront cost of electric cars, making it easier for drivers to afford them.

The most popular (and most valuable) incentive is the federal EV tax credit, worth up to $7,500. But, it comes with a few caveats and it will not be available for every vehicle.

Additionally, many states offer their own incentives in the form of rebates or tax incentives, giving you more ways to save.

Check what it would cost to get solar panels to pair with your EV

Key takeaways

  • EV incentives can help reduce the upfront costs of buying an electric vehicle.
  • You can save up to $7,500 with the federal EV tax credit depending on the size of the car’s battery and if it meets other eligibility requirements.
  • Tesla and GM have hit their incentive caps, so the federal incentive no longer applies to them. The Build Back Better Act proposes to remove the cap, and adds an additional $5,000 to the credit.
  • Many states and utilities offer additional incentives in the form of rebates and tax credits that can lower the cost of an EV even further.

On this page

    What is the Federal EV Incentive?

    The federal EV incentive is a tax credit worth up to $7,500 that taxpayers can take advantage of when buying a new electric or plug-in hybrid vehicle in 2022. The total value of the credit depends on the size of the battery - the incentive begins at 5 kilowatt-hours (kWh), which earns a $2,500 credit, and then the value increases for every additional 5 kWh, capping at $7,500.

    The credit can be applied to your federal income taxes, and the total value is limited based on how much you owe in taxes. So, if you owe less than $7,500, you cannot claim the full credit.

    In order to qualify for the federal EV tax credit, the vehicle must have a battery of at least 5 kWh in size. There is also a limit to what vehicles can get the credit based on the manufacturer. If a car manufacturer has sold more than 200,000 electric vehicles, their EVs are no longer eligible to receive the credit. EVs purchased after August 16, 2022 have to meet an additional requirement - the final assembly of the vehicle must occur in North America.

    Starting in 2023, the qualifications for the EV incentive will change thanks to the passing of the Inflation Reduction Act. The Act removes the 200,000 manufacturer limit but adds new income requirements, MSRP requirements, mineral requirements, and assembly requirements. The new criteria could make it more difficult for electric cars to qualify, but are designed to encourage North American manufacturing and provide incentives only to those who need them most.

    Will the EV I want qualify for the federal EV Incentive?

    The end of 2022 is a tricky time to buy an EV. The 200,000 cap on manufacturers is still in effect, meaning Tesla, GM, and Toyota are still off the table until 2023. But, cars that previously would have qualified prior to the IRA being signed no longer do, like the Volvo XC40, because they are not assembled in North America.

    So, what cars do qualify? The BMW 330e and xDrive45e, certain Ford EV models, the Nissan Leaf, and the Mercedes EQS can potentially claim the tax credit. This is quite a short list, but as new rules fall into place and manufacturers begin to adjust their supply chains, more cars will qualify.

    Unfortunately, it is hard to say what other cars will be eligible for the federal EV incentive in 2023 because many of the requirements are still being drawn up. The critical mineral requirements are not yet finalized, but the rule states that the “final assembly” for each car needs to take place within North America.

    Will the EV I want qualify for the federal EV incentive?

    The end of 2022 is a tricky time to buy an EV. The 200,000 cap on manufacturers is still in effect, meaning Tesla, GM, and Toyota are still off the table until 2023. But, cars that previously would have qualified prior to the IRA being signed no longer do, like the Volvo XC40, because they are not assembled in North America.

    So, what cars do qualify? The BMW 330e and xDrive45e, certain Ford EV models, the Nissan Leaf, and the Mercedes EQS can potentially claim the tax credit. This is quite a short list, but as new rules fall into place and manufacturers begin to adjust their supply chains, more cars will qualify.

    Unfortunately, it is hard to say what other cars will be eligible for the federal EV incentive in 2023 because many of the requirements are still being drawn up. The critical mineral requirements are not yet finalized, but the rule states that the “final assembly” for each car needs to take place within North America.

    What is the downside to the Federal EV Incentive?

    The federal incentive was put into place to encourage consumers to purchase EVs that are slightly more expensive than comparable gas cars. Aside from the 200,000 cap that hinders your car choice, you’re now even more limited because of the North American assembly requirement.

    Another downside is that the incentive is a tax credit so it’s only available as savings on your taxes. This means that if you are eligible for more incentives than what you owe in taxes, you will not be able to take advantage of the full incentive amount.

    For example, if you are eligible for a $6,000 credit but you only owe $2,000 in taxes, you will lose out on $4,000 because you cannot carry the benefits over to the next year. However, in many states, there are additional utility and state incentives that can reduce the overall costs further.

    Work with your tax advisor to ensure that you get all of the savings available to you.

    What state and utility incentives are available?

    State and utility incentives vary greatly based on where you live. Some states offer nothing, some offer only time of use utility rate reductions - which you would get regardless of if you owned an EV - while others offer such great incentives that you can get an EV for incredibly cheap.

    One of the best types of incentives is a rebate - because it is essentially cash in your pocket - as opposed to tax incentives, which you might not qualify for. New Jersey, for instance, offers a great EV rebate of up to $4,000 to anyone buying an EV.

    The amount you get depends on the EPA-rated mileage range of your car, you receive $25 per mile but it is capped at $4,000, or 200 miles. What’s great is that this incentive is in addition to the tax credit, so you could potentially save $11,500 on an EV, a huge reduction in the cost.

    A popular incentive offered by some states and/or utilities is a rebate to save money when you install a level 2 charger in your home, for example the $300 rebate in Turlock, California. This does not do much to reduce the cost of the EV itself but saves you money when you buy a charging port in your home.

    Top EV incentives in 2022

    Here are the most significant incentives currently available for the purchase of an EV.

    The best electric vehicle (EV) incentives in 2022
    Incentive Amount Availability Notes

    Federal EV Incentive

    Up to $7,500

    Nationwide

    Tax credit for purchase of new vehicles. Value-based on battery capacity. Final assembly must occur in North America. Tesla, GM, and Toyota no longer qualify.

    CT EV

    Up to $9,500

    Connecticut 

    Rebate available for residents who purchase a qualifying EV.

    NJ EV

    Up to $5,000

    New Jersey

    NJ residents can receive a rebate based on the range of the EV, in miles.

    CO EV

    Up to $2,800

    Colorado

    Tax credit is eligible for Colorado residents that purchase an EV.

    CA EV

    Up to $7,000

    California

    The rebate amount varies based on where you live, your electric utility provider, your household income, and the car type.

    There are many other smaller EV incentives on offer across the U.S., mostly from utilities. With a bit of research, you should be able to find all applicable incentives in your area; a local car dealership can point you in the right direction.

    If you live somewhere with no additional incentives - and find that EVs are out of your budget - there’s still good news. The cost of EVs is decreasing overall, and will soon be on par with the upfront cost of a gas-powered car.

    The true cost of EVs

    As of September 2022, the average cost of an EV is about $66,000, while a gas-powered car is around $47,000. Obviously, the EV cost is higher than the gas-powered car, but there are a lot of factors at play in late 2022 that are driving up the cost of all cars - from supply chain issues to higher labor costs.

    The clean vehicle tax credit can help reduce the upfront cost of an EV, but it is also important to keep in mind that an EV is cheaper to maintain and run over its lifetime, up to 40% cheaper. Think about it, no gas to fill up and zero oil changes.

    Keep in mind that the cost averages we've mentioned are just that; averages. The cheapest fully electric car you can buy is the Nissan Leaf starting at around $28,895. On the other side, there are gas-powered cars that start as low as $16,595, a much more practical price for many Americans.

    Interior rendering of an EV battery
    EV car batteries are the most expensive component of an EV. Source: Car Magazine

    The reason EVs tend to have a higher price is that the cost of the batteries within them are expensive. This is due to the high cost of their raw materials, as well as the fact that they are still relatively new and have not yet become as economical to manufacture.

    But as battery production becomes more efficient and widespread, the cost of EVs will continue to decrease. Additionally, many EVs are “luxury” vehicles that appeal to early adopters who can afford the price tag. As they become more mainstream and easier to manufacture, cars with a price that appeals to more consumers will follow.

    Does an EV make sense?

    There are many benefits to owning an electric car, from reduced maintenance to a lower carbon footprint.

    Although the upfront cost might be more expensive than traditional cars, an EV can still make financial sense. Federal EV incentives will help reduce the initial cost of the car, and the overall lifetime savings will keep your car ownership costs low.

    Pairing your EV with solar panels will make the costs even lower, further increasing your savings. Solar panels are an attractive investment thanks to a 30% tax credit and higher-than-ever electric prices. Now is the time to go all out on renewable energy, adding solar panels to charge up your electric vehicle, saving you money for years to come.

    Estimate your EV charging savings with solar panels
     - Author of Solar Reviews

    Ana Almerini

    Content Specialist

    Ana is a content specialist at SolarReviews. She uses her experience in marketing and knowledge from her master's in climate communications to research and review the solar industry.

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