Tax Credits Change for Tesla Vehicles: Model Y In and Model 3 RWD Out

IRA Tax Credit Changes for Tesla Vehicles

You have until April 18th to buy a Model 3 RWD in the U.S. and to get the $7,500 IRA tax credit for it. After that, it appears the credit is completely going away for this vehicle.

This is a big blow to this particular vehicle, which is the cheapest and most affordable Tesla. The new tax credit requirements have been updated and are:

At least 50% of an EV's battery components must be produced and assembled within the United States or in a country with a free trade agreement for the vehicle to qualify for the IRA tax credits.

This, of course, takes the Model 3 RWD with its LFP batteries right out of the full tax credit because those batteries are purchased by Tesla from CATL in China. It is now halved at $3,750.

There is good news, however. All the Model Y variations and the Model 3 long range and performance will retain the full $7,500 tax credit. As I said, this puts the Model 3 RWD in a precarious position. Here's why:

The Model 3 RWD price is $42,990.
The Model Y Long Range price is $54,990.

That puts the base Model Y long range price at $12,000 more than the Model 3 RWD. If you then add in the tax credit for the Model Y long range, you subtract $7,500, and you get a price of $47,490.

The difference then between a Model Y long range and a Model 3 RWD is a mere $4,500+$3,750 or $8,250. Tesla is going to have to reduce the price of the Model 3 RWD by at least a few thousand dollars for it to remain a competitive vehicle.

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Future Tax Credits and Tesla Vehicles

What does the future hold for these two vehicles? The Model Y long range is going to continue to grow in sales, especially in the U.S. with the ongoing tax credit. It's not much more expensive than a Model 3 RWD when you factor the tax credit in.

The Model 3 RWD is going to have to undergo major changes with Project Highland - or whatever Tesla decides to do to reduce costs.

CATL is supposedly building a battery factory in the U.S. and when that comes online and starts producing batteries for the Model 3 RWD, then I think we'll see a resurgence of the Model 3 RWD.

As it stands right now, the Model 3 RWD is in this weird place where it's just slightly cheaper than a Model Y long range, but not cheap enough for it to be bought in significant quantities.

Look for this to change once the CATL battery factory in the U.S. is up and running and Tesla has made improvements to reduce the cost of the Model 3 RWD to below $40,000. Once you have a $39,000 Model 3 RWD that gets a full tax credit, I expect to see its sales start to go up.

Whenever the Model 3 long range comes back to order and the Model 3 performance are still eligible for the full $7,500 tax credit.

What do you think about the new tax credit changes? Will you buy a Tesla before April 18th?

In Related News: Elon Musk Gives Nod to Model 3 - Project Highland

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Jeremy Johnson is a Tesla investor and supporter. He first invested in Tesla in 2017 after years of following Elon Musk and admiring his work ethic and intelligence. Since then, he's become a Tesla bull, covering anything about Tesla he can find, while also dabbling in other electric vehicle companies. Jeremy covers Tesla developments at Torque News. You can follow him on Twitter or LinkedIn to stay in touch and follow his Tesla news coverage on Torque News.

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