Tesla Model 3 Now Priced Below $40,000 — Is It Available for Tax Credits?

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The Tesla Model 3 is one of the most popular electric vehicles. Read on to see how tax credits can make it even more affordable. 

Prior to the passage of the Inflation Reduction Act in 2022, Tesla vehicles had become ineligible for electric vehicle tax credits due to the large number of vehicles the company sold. But the act got rid of the per-manufacturer volume cap, making Tesla vehicles potentially eligible once again.

However, the rules governing electric vehicles and tax credits are rather complex, so here’s a quick guide to the Tesla Model 3’s tax credit eligibility and how much you could potentially get back if you buy one.

Current electric vehicle tax credit rules

Electric vehicle tax credits can save you as much as $7,500 on the purchase of a new vehicle. However, the requirements to claim the credit have changed significantly thanks to recent legislation, so here’s a rundown.

First, the credit is income restricted. To qualify, couples filing a joint tax return must have income of less than $300,000 in 2023. For single filers and heads of household, these thresholds are $150,000 and $225,000, respectively.

Second, the vehicle itself also must meet certain requirements, such as having a battery pack with at least seven kilowatt hours of capacity. And, its final assembly location must be in North America.

Finally, the maximum manufacturer’s suggested retail price (MSRP) is $80,000 for vans, SUVs, and trucks, or $55,000 for other vehicle types. This rule excludes certain popular models like the Lucid Air and Tesla Model S.

Is the Tesla Model 3 eligible?

Assuming that you meet the income requirements, Tesla Model 3 sedans with MSRPs of $55,000 or less are eligible for federal tax credits. However, due to some of the new calculation criteria put in place by the Inflation Reduction Act of 2022, certain Model 3s are only eligible for half of the maximum for deliveries after April 18, 2023.

Specifically, here are the tax credits each type of Model 3 is eligible for:

It’s worth noting that Model 3 vehicles can exceed MSRPs of $55,000 and therefore can become ineligible. In particular, the Model 3 Performance has an MSRP that starts at $53,240, but adding certain options could push it over the limit.

Also, these incentives are for personal vehicles. If you buy a Model 3 for your business or eligible tax-exempt organization, you can claim a credit of as much as $7,500 for any Model 3, regardless of which trim level you choose or what the MSRP is.

Other reasons to buy a Model 3

In addition to the federal tax credits, you might also be eligible for state tax incentives, depending on where you live. As one example, Massachusetts offers electric vehicle credits of as much as $3,500 on cars purchased for less than $55,000. So, that’s definitely worth looking into.

Additionally, there are other considerations when deciding on an electric vehicle. While electric power certainly isn’t free, buying an electric vehicle like the Tesla Model 3 can typically offer significant savings over the cost of gasoline in a comparable car. On the negative side, electric vehicles can be more expensive to insure than gasoline-powered vehicles due to their generally higher repair costs.

The bottom line is that the Tesla Model 3 may be eligible for tax credits depending on the exact specifications and MSRP of your vehicle. And if there is any gray area in your eligibility, it’s a good idea to consult with an experienced tax professional for guidance.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.

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