All Tesla Model 3 and Model Y Trims Qualify for a $7,500 Tax Credit After IRS Rule Change

The Treasury vehicle classification related to IRA tax credits has confused many people, considering the arbitrary rules used to divide vehicles into classes. Thankfully, the auto industry and consumer lobby have convinced the IRS to switch to the EPA Fuel Economy Label standard. All Tesla Model 3 and Model Y trims now qualify for the full $7,500 IRA tax credit.
All Tesla Model 3 and Model Y trims qualify for a $7,500 tax credit 6 photos
Photo: Tesla
Tesla Model 3 and Model YChevrolet Bolt EVVolkswagen ID.4Ford Mustang Mach-ECadillac Lyriq
The Inflation Reduction Act is a powerful tool aimed at promoting clean transportation and local manufacturing, although the way it was implemented was far from optimal. The IRS botched it, first by failing to write the rules of origin in time for the January 1 deadline and then by classifying vehicles based on arbitrary rules, which led to an industry backlash. This has made the Volkswagen ID.4 be considered an SUV if it comes with AWD, but not without, while the Cadillac Lyriq was demoted altogether from the SUV category. Similarly, the Tesla Model Y was considered an SUV only when fitted with three seat rows.

The classification is vital because an SUV, van, or pickup truck qualifies for the $7,500 tax credit up to a maximum price of $80,000, whereas other vehicles are capped at $55,000. This has generated frustrations throughout the industry, as many SUVs would not qualify because their prices exceeded the $55,000 limit. This was the case with all five-seat Tesla Model Ys before the recent price cuts.

Following a powerful lobby from the auto industry, the Treasury acknowledged the shortcoming of their classification and promised to look into it. Now, it changed the classification rules to match the EPA Fuel Economy Label, as General Motors requested.

“This change will allow crossover vehicles that share similar features to be treated consistently,” Treasury said in a news release Friday. “It will also align vehicle classifications under the clean vehicle credit with the classification displayed on the vehicle label and on the consumer-facing website”

The best part is that people who purchased and took delivery of vehicles after January 1 can still claim the tax credit if the car they bought qualifies under the new classification standard. That is, even if the vehicle did not qualify at the time of purchase based on the previous vehicle classification standard. This is good news, allowing more people to benefit from the IRA tax credit.

The Treasury has published a list of qualifying vehicles under the new classification, and we’re happy to see all Volkswagen ID.4 trims are included. All Tesla Model 3 and Model Y versions are also on the list, while GM is certainly pleased to see that the Cadillac Lyriq is now accepted as a proper SUV. Of course, the Chevy Bolt duo is still on this list, making it the most accessible electric vehicle in the U.S. Ford E-Transit, Mustang Mach-E, and F-150 Lightning also qualify, together with the Escape Plug-in Hybrid, Lincoln Aviator Grand Touring, and Lincoln Corsair Grand Touring.

There are other models on the list from different manufacturers, so it’s worth checking out the IRS website if you’re curious. Besides those makes and models, 11 other carmakers expressed their desire to become “qualified manufacturers”, but haven’t yet submitted a list of specific makes and models that are eligible. The list will likely be soon populated with many more models from different manufacturers.
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About the author: Cristian Agatie
Cristian Agatie profile photo

After his childhood dream of becoming a "tractor operator" didn't pan out, Cristian turned to journalism, first in print and later moving to online media. His top interests are electric vehicles and new energy solutions.
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