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Hello, and welcome back to your regular dose of EVs Explained! Many altruistic reasons exist to switch over from a gas guzzler to an electric vehicle, like keeping hush for the neighbors or allegedly doing your part to help God’s green earth and all. But today’s topic is a little more self-interested, and that’s okay. Here. Have some EV tax credits. On Uncle Sam. But what are they?

Well, hey. You know how Tesla has been raving on about how their Model 3s are now sub-30-grand cars? Well, technically, they are and they aren’t. They’re forty-grand cars that Tesla is advertising as less by factoring in potential gas savings plus a handy little pick-me-up from the feds just for opting for an electric vehicle over a baby seal-clubbing Sonata (to Tesla-stans and Hyundai fans, that’s a joke). That’s the oh-so-desirable tax credits, my friends.

That’s correct. Right now, you can get a cool chunk of cash when purchasing an EV. And in this explainer, we’ll be going over what an EV tax credit is, what you need to qualify, and how it will change looking forward. No tech lessons today. Right now, it’s all about the moolah!

Tax liability and the EV tax credit

Last summer, the Inflation Reduction Act of 2022 was passed into law by Congress. The bill includes revisions to the credit for qualified plug-in EVs and fuel cell electric vehicles purchased from 2023 to 2032. Purchasers of this type of vehicle may now be eligible for a tax credit of up to $7,500 for new EVs and up to $4,000 for used EVs (limited to 30% of the sale price). This would lower your tax liability for whatever you qualify for up to that amount. 

It is important to note this is a nonrefundable tax credit. You need to have enough tax liability if you want to capture the full amount that the vehicle you’re purchasing is qualifying for. In layman’s terms, what that means is that you have already exceeded your allowable. You will not see any overage as a refund during the approaching tax season and you cannot apply excess credit to the following tax year.

“Wait, stop. What exactly is tax liability?”

Simply put, it’s just the total amount of money owed at the end of the tax year. If you are a general W-2 employee, every paycheck you receive from your company already has taxes taken out automatically. That goes to your tax liability throughout the year. At the end of the year, when filing your tax return, this is the time when you add in any credits and deductions that you qualify for. Once applied, that number you’ve arrived at is now your adjusted tax liability. If you paid more if you’re W-2, you get a refund. If you didn’t pay enough to cover, well, you owe the IRS money. Tax liability is the total, not the difference between what was owed and what was paid.

Phew.

“Mr. Tilleli, can you use ‘tax credits’ in a sentence?”

So a qualifying vehicle such as a Chevy Bolt purchased today (assuming you qualify for the full amount) will let you realize $7,500 toward your tax liability come April of 2024 when you file your taxes. You will use Form 8936 when filing your federal income taxes. Conversely, if you started with a daily low tax liability and have already lowered it through other credits, such as claiming dependents, it’s possible that there isn’t enough liability left to receive the full $7,500. You only realize what you have remaining in your tax liability.

The bill allows for one credit per vehicle. You can claim a tax credit for every qualified vehicle you purchase. However, there are still income limits to be mindful of, and since your tax liability can only be so much, the tax credits you’d be eligible for will also only be so much.

Sorry. No infinite money glitch for flipping a bunch of EVs. You can’t Forza Auction House hack your way out of this one.

What vehicles qualify?

Many new EVs are eligible for the full amount of  $7,500 though there are exceptions. It’s best to think of the tax credit in two different components — the battery requirement and the critical minerals requirement. Each is responsible for a partial credit of $3,750, each adding up to half of the new tax credit.

For the battery requirement, a certain percentage of the vehicle’s battery must be assembled or manufactured in North America. Over the next ten years when the Inflation Reduction Act of 2022 is in effect, the required percentage is going up for manufacturers. Those percentages are as follows:

• 2023: 50%
• 2024: 60%
• 2025: 60%
• 2026: 70%
• 2027: 80%
• 2028: 90%
• 2029-2032: 100%

For the critical minerals requirement, we’re dealing with a similar story. A certain percentage (that will increase over the decade) of the minerals in the car’s battery must be extracted or processed within the United States or within a country that has a free-trade agreement with the U.S. Percentages are as follows:

• 2023: 40%
• 2024: 50%
• 2025: 60%
• 2026: 70%
• 2027-2032: 80%

A couple more stipulations exist as well such as restricting the sourcing of battery components or critical minerals from foreign countries of concern such as China. Those go into effect in 2024 and 2025, respectively. However, if you seek the tax credit amount for a specific EV vehicle, the most up-to-date information exists at fueleconomy.gov where you can look up eligible models and filter based on purchase scenario, model year, and vehicle type, among other stats like MPGe and total range.

How do you qualify?

Beyond the vehicle qualifications, you must also consider the personal qualifications. In order to qualify for the credit, the vehicle you are purchasing must be for your own use (not resale) and primarily driven in the United States.

Your tax filing status and modified adjusted gross income are also part of the picture. The following are the upper-income limits for each status:

• $300,000 for married couples filing jointly 
• $225,000 for heads of households
• $150,000 for all other filers

2024 and onward

As stated in the earlier explanation, the tax credit is currently set up in which you claim the tax credit when filing your taxes. However, in 2024, a new option will allow a purchaser of a clean vehicle to transfer that credit to an eligible entity. What is an eligible entity? Well, the dealer that sold it to you.

Psst. It’s the car.

This means you can fully realize the tax credit at the time of sale, turning it into an upfront discount applied toward your purchase. So if you were to purchase that Chevy Bolt in 2024, instead of paying the list price of $26,500, you could transfer that credit, getting the EV for $19,500 – provided you qualify.

However, we still have some unanswered questions. If you apply the $7,500 at the time of purchase and do not have $7,500 in tax liability, you will owe the IRS back that money. The process for this is still yet to be defined in terms of how you will determine at the time of purchase. It is unclear if there will be interest or fees or something along those lines, but the IRS will be entitled to recapture. 

Last thoughts

With this tax credit in place, we expect to see a lot more EVs coming onto the road over the next decade. Sometimes, a little bonus is needed to push folks into going green. The tax credit is an excellent incentive for drivers to make the switch, but bear in mind that the process of qualifying and claiming said credit can be a bit overwhelming. Note that everything discussed above is meant to help demystify the EV tax credit and should not be interpreted as financial advice.

If you still have questions pertaining to your own situation, consider consulting a qualified tax professional. I’m just Joe.

“Now presenting our brand-new (insert new EV here), with a 50-kWh battery pack and 300 kW motors,” exclaims some extravagant press release from yet another startup. While it’s quite nice of you to spill all the beans like that, I’m still left wondering what the heck some of these measurements mean, and I’m sure some of you are too.

Welcome to this blooming age in the automotive landscape, where electrified cars stand on as big a pedestal as traditional dinosaur-powered performance vehicles. So many newfangled machines. So much innovative tech. Yet, interestingly, there’s not much in the way of explanation behind some of the most basic terminology, and what few definitions do exist lie buried under mounds of glitzy press material and spec sheet drag racing.

We’ve all read the brochures and the magazine reviews, diving into the colorful world of fully electric cars and plug-in hybrids. They’ll toss around new terminology like it’s already in the common vernacular, ignoring the fact that this is still relatively fresh tech being drip-fed to the world. Therefore, many terms haven’t fully clicked in people’s minds. But hopefully, this new explainer series should clear the fog around these words that are becoming as household as “horsepower” or “miles per gallon.” 

Our inaugural lessons to kick off this series: what the heck even are “kilowatts,” how do they relate to electric cars, and how do they pair with the equally-tossed “kilowatt-hours?” Well, I’m glad I asked – and hopefully drove enough interest to entrap you here – because it’s time to get schooled in five minutes or less.

What is a killowatt?

This frequently-spoken term is not exclusive to EVs or electricity and can trace its core components back to pretty much any of our high school science and math classes. Anyone who has ever stumbled across a German auto magazine will likely guess where this is going.

Kilowatts are merely a metric measurement of power output, just like horsepower. Plain and simple.

A kilowatt (kW), which translates to 1,000 watts (W), is the alternate unit of measurement if you’re too cool for horsepower. If you want to click with your new friends from Frankfurt, talk about how many kilowatts the straight-six in their 1995 C36 AMG makes. There’s even a brainless, one-step formula for converting kilowatts into ponies. Simply multiply your kilowatts by 1.341. 

For instance, let’s say you stumble across aforeign auto magazine talking about how the E92 M3 GTS had a power output of 331 kW – again, metric, so 331,000 W if you wanted to break it down. Before you scroll another line down the spec sheet looking for a pre-calculated conversion, you can multiply that 331 by 1.341 to get 443.87, on par with the manufacturer-claimed 444 horsepower. 

Bingo! Easy, right?

Shift over to electric cars. Just as horsepower has become the ubiquitous unit of power measurement for internal combustion engines, the kilowatt has achieved a similar status for electric motors and may be used to denote output before official horsepower and torque ratings are published. The methodology for translating power measurements remains unchanged from pistons and cylinders to stators and magnets. Imagine some gilded brochure for the Tesla Model S Plaid that states that its motors’ combined output equals 760 kW. Multiply that by 1.341, and bam! 1,019.16, in line with its 1,020 horsepower rating. 

Tracking? Heck yeah, you are!

But the way that kilowatts relate to EVs is only half the story. One must also understand their relation to battery packs.

What is a kilowatt-hour?

While electric motors measure power output by kilowatts, battery packs measure energy capacity by kilowatt-hours. If you’ve read this far and decided you can’t stand me, please consult this handy YouTube video below for its breakdown of what a watt hour is and how it’s calculated. However, should you despise video explainers more than my written words, then please bear with me, as there’s a bit more to it than what we’ve discussed so far.

“How battery capacity is measured and what is Wh? (Watt Hour)”

A kilowatt-hour (kWh) determines how much energy can be expended over a unit of time, which, in the context of EVs, directly relates to a vehicle’s maximum power output and range. While the kWh is now a standard unit for measuring EV battery capacity, it’s long been a common unit of measurement for energy consumption in homes and appliances.

Back to the Model S Plaid, let’s say you’re flooring it down the highway at a perfectly legal speed. Your foot’s all the way down on the throttle, extracting every bit of that 760 kW output. Welp. Congrats. You’ve killed it. The car dies within seven to eight minutes or roughly 0.13 hours after starting with a full charge, as the Model S Plaid’s battery has a capacity of 100 kWh, meaning it can expel 100 kW of power over roughly an hour. 

Now, let’s switch things up and say you’re on your way home from doing Tesla owner things, such as hot yoga and overpaying for bread with avocado on it (this is satire, by the way, so relax.) You’re taking it easy and hypermiling every stretch of the way, probably only expending an average of 50 kW during your drive. You’ll likely see about two hours’ worth of use and be able to travel a significantly farther distance with that 100 kWh battery than if you were to demand maximum attack from the electric motors a majority of the time.

Humorously, if you build some Frankenstein bastard child of a project car using the Plaid motors hooked up to a base model Nissan Leaf’s 40 kWh battery and went flat out, the party would be over in less than three minutes. Do with that information as you will, project car YouTubers of the world. 

That’s perhaps the simplest way to explain its relevance to prospective consumers. Smaller battery packs with lower capacities will result in shorter overall ranges and limit how much power an EV can reasonably output, while larger battery packs flip the script, enabling longer distances and more kW of power.

It’s why you often see the pricier, long-range variants of electric vehicles sport more powerful motor setups and longer overall ranges, thanks to their higher kWh rating. And it’s partly why some performance variants with even more powerful motors wired to the same batteries (or even slightly bigger) may have shorter ranges, as their elevated performance now demands more from the battery, in addition to other factors like stickier tires, thermal challenges, and aero changes.

“Watt do you mean it can’t charge any faster?”

Last tidbit! Before we go too deep down a rabbit hole that’d require another article, let’s discuss how kilowatts and kilowatt hours pertain to charging your EV. Yes, everyone’s least favorite part. 

Just as kilowatts measure the power coming out of your EV, kilowatts can very much be used to measure the power going back into your EV, hence why we also measure chargers’ outputs in kW.

For example, a 50 kW charger will theoretically fully replenish a 50 kWh battery from next to nada in roughly an hour. A 100 kWh “fast charger” should be able to do the deed on the same battery in approximately 30 minutes. Ever wonder how these fast chargers can get monstrous powerhouses like the Model S Plaid, Lucid Air, or Taycan Turbo S up and ready to rock in less than an hour? Because fast chargers can output anywhere between 150 to well over 300 kW.

Note other limitations can hinder how quickly an electric car can charge, including the set kilowatts an EV can accept. For instance, the new Volvo EX30 only has a maximum charge rate of 153 kW, which is more than enough for its 64 kWh battery, but far behind the 350 kW max charge rate of a comparable Hyundai Ioniq 5.

Class dismissed… for now.

Of course, there are so many other smaller factors that feed into the performance, charging, and discharging of an electric vehicle, which we can spin into another piece. But that’s the basic jist of the relationship between the fat K-W and the new wave of electric chariots.

For now, remember that kilowatts measure the power the car uses and produces while kilowatt-hours represent the energy stored in the battery pack, which directly impacts the EV’s range and output. And to any prospective owners out there, I hope this lesson has better equipped you to shop with confidence – or at least read Euro auto mags without scratching your head at the power figures.