Tesla noted on its website that the entry-level Tesla Model 3 might soon not be eligible for the full $7,500 federal tax credit.

The company wrote that the "$7,500 tax credit is anticipated to be reduced for Model 3 [rear-wheel drive version] by March 31," encouraging customers to take delivery before that will happen. It does not surprise us, as there already were reports about that.

Once we click for more details, Tesla explains:

"On January 1, 2023, the Inflation Reduction Act of 2022 qualified certain electric vehicles (EVs) for a tax credit of up to $7,500. This $7,500 credit is anticipated to be reduced for Model 3 Rear-Wheel Drive by March 31, 2023.

Note: This credit is in effect for deliveries taken before an update to the federal guidance, which Treasury and the IRS intend to issue no later than March 31, 2023."

The issue with the Tesla Model 3 RWD is that it's equipped with batteries sourced from China. As far as we know, these are prismatic lithium-ion LFP cells from CATL. Other Tesla Model 3 and Tesla Model Y are equipped with locally produced, cylindrical lithium-ion cells (NCA/NCM chemistry).

This is important because the Inflation Reduction Act of 2022 (IRA) requires that, as of 2023, 40 percent of the value of critical minerals need to be mined or processed in the United States (or FTA countries), or recycled in North America. Additionally, 50 percent of the value of battery components must be manufactured or assembled in North America.

Those requirements will increase in the following years, as shown in an outstanding Fact Sheet IRA EV Tax Credits, released by Electrification Coalition and SAFE.

In other words, if the Tesla Model 3 RWD's battery (LFP) does not meet one of the requirements, the federal tax credit will be reduced from $7,500 to $3,750. If both requirements are not met, then the vehicle will not be eligible for any tax credit.

We don't know the details, but if Tesla says that a reduction is anticipated, then probably one of the requirements will be met, and the entry-level version will be eligible for $3,750.

The available maximum tax credit, depending on meeting the critical mineral and battery component requirements:

  • EVs that meet both requirements: $7,500
  • EVs that meet only one requirement: $3,750
  • EVs that do not meet requirements: $0

Other requirements for new cars concern the price and income:

MSRP limits:

  • SUVs, vans, pick-up trucks: $80,000
  • Other Vehicles (cars): $55,000

Income limits for different tax statuses:

  • Single: $150,000
  • Head of HH: $225,000
  • Filing jointly: $300,000

A lower incentive for the Tesla Model 3 RWD will undermine its competitiveness - both against other BEVs and the higher-trim Model 3 Long Range AWD, which is sometimes available through existing inventory (it's promised to be available via standard orders this year).

There is a big chance that Tesla might reduce the price of the Tesla Model 3 RWD in April, or finally reintroduce the Tesla Model 3 LR AWD.

Prices as of March 30, 2023:

Model Base Price Dest. Charge Tax Credit Effective Price
2023 Tesla Model 3 RWD 18-inch $42,990 +$1,640 $7,500 $37,130
2023 Tesla Model 3 RWD 19-inch $44,490 +$1,640 $7,500 $38,630
2023 Tesla Model 3 Long Range AWD 18-inch        
2023 Tesla Model 3 Long Range AWD 19-inch        
2023 Tesla Model 3 Perf. LR AWD 20-inch $53,990 +$1,640 $7,500 $48,130

* Tesla adds a Destination fee (DST) of $1,390 and an Order Fee of $250 to all its models ($1,640 total).

The case of the Tesla Model 3 RWD is not an exception, and some other BEVs might be affected by the additional requirements as well. Let's wait for the official federal guidance.

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