Cash For Clunkers – Tax Rules

by Mike Holman

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The popular Cash for Clunker car trade-in program has just ended after handing out $3 billion dollars of cash for consumers to upgrade their older cars and get a brand spankin’ new ride which hopefully gets better gas mileage than the old one.

This program – officially knows as the Car Allowance Rebate System (CARS) was created earlier in the year as part of President Obama’s stimulus package for 2009.  This program was primarily designed to help stimulate the big car companies which have been enduring poor sales.  The other intention is to help the environment by burning less gasoline in more fuel-efficient cars.

[edit Sept 27 - Cash for Appliances - List of Eligible Appliances]

[edit Dec 9 – Cash for Caulkers

One very common question which has come up recently has been the taxation of any Cash for Clunker voucher money received by a person using the program. Some websites have been reporting that the entire amount of the credit is taxable income and will be added to your taxable income for the year.   This is not true – the government Cash for Clunker website specifically addresses this issue and says:

Is the credit subject to being taxed as income to the consumers that participate in the program?
NO. The CARS Act expressly provides that the credit is not income for the consumer.

Tax treatment of Cash for Clunker payments

If you are concerned about having any tax issues as a result of trading in your old clunker and getting a voucher or credit for a new car then put your mind at ease.  The discount you received off the new car purchase price is not considered taxable income so no taxes will have to be paid on it.

The taxation of this plan is the same as if you had just traded in your car or even if you had sold the old car separately.  The cash for clunker voucher amount or the sale proceeds from a used car sales are generally not taxable since they are probably less than the amount paid for the car originally.  You can’t claim the loss on your car since government law doesn’t allow capital gain losses to be claimed on depreciating assets.

The voucher or credit amount for your clunker is not “income” or any kind of bonus money.  It’s simply a payment for your old car which is not taxable.  In effect you are basically selling your old junker to the government for either $3500 or $4500.

How the Cash for Clunker program works

The main concept behind the Cash for Clunkers program is that you can trade in your old gas guzzler car for a new car which has better mileage.  The government will pay you either $3500 or $4500 for your trade in.  Obviously this is only worth doing if your current older car is worth less than the potential rebate amount.  If your car is worth more than the voucher amount then you are better off just doing a normal trade-in or selling it privately.

Rules of the 2009 Cash For Clunkers program

  • Car must be less than 25 years old (built in 1984 or later).  This applies to the date of trade-in relative to the manufactured date of the car.  See section below for more info.
  • Can only be used for trade-in on a new 2008,2009 or 2010 car.  Outright purchase or lease.  Used car purchases are not eligible.
  • Trade-in car must get 18 mpg or less (city/highway combined).  See this website to find out the mileage for your car or this site to find your car.
  • This program has ended so no more trade-ins.   Trade-in must occur on July 1, 2009 or later.
  • The new car must have a purchase price of $45,000 or less.
  • Credit will be either $3500 or $4500.  If the new car gas mileage is between 4 and 10 mpg more than the old car then the credit is $3500.  If the difference is at least 10 mpg then the credit is $4500.
  • Applies to new cars of any country – domestic and foreign cars are all eligible.
  • The new car must have a combined fuel economy of at least 22 mpg.  See this website to find out the mileage for your car or this site to find your car.
  • The credit will be applied to the purchase of the new car.
  • The car buyer doesn’t have to file anything – the car dealer will handle the documentation.
  • The credit will not be considered as income for the car purchaser.
  • All the normal credits and rebates for the new car will still apply in addition to the ‘cash for clunker’ credit.
  • The trade-in car must have been owned by you and insured for the past year (ie 365 days).  You must provide documentation for this.
  • Car must be driveable!!

More articles on this issue

[edit Aug 30 – Cash for Appliances program announced – Get rebates for new fridge or other appliances.

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