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New Rules Limit Tax Credits on Electric Vehicles, Reducing Model Choices for U.S. Consumers

by Anna

New rules implemented as part of the Inflation Reduction Act signed into law in 2022 have limited the tax credits available to U.S. consumers looking to purchase electric vehicles (EVs). The rules, effective as of January 1, prioritize U.S. domestic materials and manufacturing in an effort to encourage the use of locally sourced components. The rules specifically target battery components from countries labeled as “of concern,” including China, Russia, North Korea, and Iran.

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The new regulations have significantly reduced the number of EV models eligible for tax credits, impacting automakers’ ability to qualify for incentives. Only 13 out of over 50 EVs currently available in the U.S. are eligible for the credits in 2024, down from around two dozen models that qualified in 2023. Notably, the rules affect various trim levels and variants of the same model differently.

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Affected automakers are working to adjust their supply chains to comply with the new requirements and make their models eligible for tax credits. Despite the reduction in the selection of tax-credit-eligible EVs, industry experts believe that the impact on consumer acceptance is likely to be temporary. They expect automakers to adapt and expand the availability of eligible models over time.

Buyers of qualifying vehicles can now have the tax credits applied at the time of purchase, with dealers fronting the cost. More than 8,700 U.S. dealers have signed up to offer this benefit. Additionally, General Motors is providing a $7,500 discount on models that lost eligibility, and other deals are available across the market.

One positive development for EV buyers is that leased EVs are not affected by the new rules, as they are considered “commercial vehicles” with different requirements. This allows consumers to receive the full tax credit amount through a lease, even if the vehicle would not qualify for a purchase.

The transportation sector is a significant contributor to total U.S. emissions, and the push for EV adoption is crucial for reducing the country’s carbon footprint. While EV sales grew by 47% to a record 1.19 million in 2023, affordability remains a concern for mainstream buyers. The average cost of a new gas-powered vehicle is still lower than that of an EV, impacting purchasing decisions for some consumers.

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