Why Is Tesla No Longer Eligible for the Full Tax Credit?

The landscape for electric vehicle incentives has shifted, making Tesla’s eligibility for the full federal tax credit a complex issue. The primary reasons for this change are new government regulations that have introduced vehicle price caps, specific criteria for battery components, and sourcing standards for raw materials. These rules explain why some Tesla models that were once eligible for a tax credit no longer qualify, or qualify for a reduced amount.

The Previous Tax Credit System and Tesla

Before the current regulations, the main federal incentive was a tax credit of up to $7,500, governed by a rule under Internal Revenue Code Section 30D. This system placed a cap on the number of vehicles a single manufacturer could sell before the credit would begin to phase out. Once a manufacturer sold 200,000 qualifying electric vehicles, the tax credit for its customers would be systematically reduced before being eliminated.

Tesla was one of the first automakers to reach this 200,000-vehicle threshold, hitting the milestone in July 2018. Following the phase-out rules, the credit for Tesla buyers was first reduced to $3,750, then to $1,875, and was finally eliminated. For a significant period before the new legislation, no Tesla vehicle was eligible for any federal tax credit as a direct result of its sales success under the old system.

New Clean Vehicle Credit Rules

The Inflation Reduction Act of 2022 overhauled the electric vehicle tax credit system, creating the New Clean Vehicle Credit and eliminating the 200,000-vehicle manufacturer cap. This change introduced a new, more stringent set of requirements that a vehicle must meet to qualify for the full $7,500 credit. These rules are designed to encourage domestic manufacturing and sourcing.

A primary requirement is a cap on the Manufacturer’s Suggested Retail Price (MSRP). For a new clean vehicle to be eligible, its MSRP cannot exceed certain limits. Sedans and other non-SUV vehicles are subject to a $55,000 price cap. Vans, sport utility vehicles, and pickup trucks have a higher limit of $80,000. This rule disqualifies higher-priced premium vehicles from receiving the credit.

The $7,500 credit is now split into two parts, each worth $3,750, based on battery sourcing. To qualify for the first $3,750, a certain percentage of the critical minerals in the battery must be extracted or processed in the United States or a country with which the U.S. has a free trade agreement. To qualify for the second $3,750, a percentage of the battery’s components must be manufactured or assembled in North America.

A significant addition is the “Foreign Entity of Concern” (FEOC) provision. Under this rule, a vehicle is ineligible for the credit if any of its battery components are manufactured or assembled by a FEOC. As of 2025, this exclusion also applies to the battery’s critical minerals. This provision targets supply chains linked to specific foreign countries. Furthermore, the vehicle’s final assembly must occur in North America.

How the New Rules Affect Specific Tesla Models

The Model 3, classified as a sedan, is subject to the $55,000 MSRP cap. While some configurations of the Model 3 fall under this price, its eligibility for the tax credit has been inconsistent. The primary issue for the Model 3 has been its battery sourcing. Changes in its supply chain, particularly related to components from countries under the FEOC definition, have caused certain trims like the Rear-Wheel Drive and Long Range versions to lose eligibility.

The Tesla Model Y benefits from its classification as an SUV, allowing it to use the higher $80,000 MSRP cap. This gives buyers more flexibility with options and trims while remaining under the price limit. Many configurations of the Model Y have retained eligibility for the full $7,500 credit. However, because battery sourcing can change, not all Model Y versions are guaranteed to qualify at all times.

For Tesla’s premium vehicles, the Model S and Model X, the situation is straightforward. Both models have MSRPs that are significantly above the $80,000 cap for any vehicle classification. Consequently, they are ineligible for the New Clean Vehicle Credit based on price alone, without considering the battery and sourcing requirements.

The Tesla Cybertruck’s eligibility depends heavily on the specific trim. Its classification as a truck allows it to fall under the $80,000 MSRP cap. However, only the All-Wheel Drive version is priced to potentially meet this requirement, as the “Cyberbeast” performance model exceeds it. The eligibility of any qualifying Cybertruck trim still hinges on its battery components and mineral sourcing complying with the FEOC rules.

Verifying Current Eligibility

Given the frequent updates to vehicle eligibility, it is important for any potential buyer to verify the tax credit status of a specific vehicle before purchase. The most reliable sources for this information are official government websites. The Internal Revenue Service (IRS) and the Department of Energy’s FuelEconomy.gov site maintain and regularly update lists of qualifying vehicles. These resources provide clarity on which models and trims meet the requirements.

Because a vehicle’s sourcing can change during a model year, the general model list may not be sufficient. The definitive way to confirm a specific car’s eligibility is by checking its Vehicle Identification Number (VIN). Dealers can look up a vehicle’s VIN to confirm its compliance with the final assembly and battery requirements. This step is important as two seemingly identical cars on a lot could have different eligibility statuses.

The process for claiming the credit has also been updated to be more immediate for buyers. Instead of waiting to file their taxes, consumers can now opt to transfer the credit to the dealership at the point of sale. This effectively works as a rebate, reducing the vehicle’s purchase price directly. To take advantage of this, the buyer must purchase the vehicle from a dealership that is registered with the IRS for this program.