Cash for Clunkers Tax Rules

The Cash for Clunkers program came to a close earlier this week. But many people still have questions about the Cash for Clunkers tax rules. Before I get into the tax rules, here’s a quick review of the program:

Cash for Clunkers Ends

The Cash for Clunkers (or CARS) Act was passed into law earlier this summer. It’s intended to stimulate the economy and get more clean vehicles on the road. The Act included giving a credit to consumers who traded in an old, gas-guzzling “clunker” for a new more efficient car. See more about the law at my previous post, Cash for Clunkers Bill.

The CARS program is now over and after a one-time extension of Cash for Clunker funds, here are the results according to the official website, Cars.gov:

“The CARS program ended sales on the Monday night with nearly 700,000 clunkers taken off the roads, replaced by far more fuel efficient vehicles. Rebate applications worth $2.877 billion were submitted by the 8 p.m. deadline, under the $3 billion provided by Congress to run the program”

I have my own opinions on the success of the Cash for Clunkers program.

Questions About the Cash for Clunkers Tax Rules

There seems to be a lot of confusion surrounding the taxability of the cash for clunkers credit. The Drudge Report today reported, “Surprise, Tax on ‘Cash for Clunkers’ Rebate” while linking to an article from South Dakota referencing the sales tax rules specific to that State.

So what’s the answer? Is there really a tax on the Cash for Clunkers credit? It really depends on what you mean by tax and where you live.

Federal Income Tax

If you’re talking about federal income taxes, then the answer is no. As a consumer, you won’t owe taxes to the Federal government for the credit you received as a result of the Cash for Clunkers trade-in. The official program website, Cars.gov is very specific about this. See this excerpt from their FAQs:

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.”

There are some complex rules on how a business must treat the sale of the clunker. For more on those rules, visit Cash for Clunkers Business Tax Rules.

State Sales Tax

But what about individual state sales tax rules? Yes, some States are including the Cash for Clunkers credit in the price of the vehicle when they are calculating the State’s sales tax due on the purchase of the vehicle. Therefore, in effect, there is a tax levied on the $4,500 Cash for Clunkers credit. It’s just not an income tax. It’s a state sales tax. Got it? Here’s more from the official website, Cars.gov:

Do I have to pay State or local sales tax on the amount of the CARS program credit? MAYBE. The question of whether a consumer must pay State or local sales tax on the amount of the CARS program credit depends on the sales tax law of each State or locality. Consumers should review the law of their respective States or consult a tax advisor to answer this question.”

With that in mind, I’ve put together two lists: (1) States that charge tax on the Cash for Clunkers credit, and (2) States that do NOT charge a sales tax on the credit.

States Charging Tax on the Clunkers Credit

  • Arizona
  • Idaho
  • Nebraska
  • New Jersey
  • New York
  • Ohio
  • South Carolina
  • South Dakota
  • Virginia
  • Washington

Remember, this is not an income tax. It’s a State sales tax. The Cash for Clunkers credit is included in the price of the vehicle when the State calculates the sales tax.

States Charging NO Tax on the Clunkers Credit

  • California
  • Connecticut
  • Florida
  • Georgia
  • Illinois
  • Indiana
  • Kansas
  • Kentucky
  • Louisiana
  • Massachusetts
  • Mississippi
  • Minnesota
  • Texas
  • Wisconsin

For more details on these State’s tax rules and links to their authorities’ websites, see Cash for Clunkers: Taxable or Not? If your State isn’t included above, it’s likely they haven’t communicated their approach online. Be sure and call your State authorities for the facts.

More Information

Cash for Clunkers Payments – Tax Rules
Cash for Clunkers Tax Rules – The Truth
Cash for Clunkers Tax Rules
Cash for Clunkers Taxable Income?
State Taxes on Cash for Clunkers
Cash for Clunkers Tax Rules
Tax Rules and Consequences of the Cash for Clunkers Program
Cash for Clunkers Stats: Who Benefited?
Does Cash for Clunkers Affect Your Taxes?
Is There a Cash for Clunkers Tax?
Cash for Clunkers Tax Rules

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Last Edited: March 8, 2014 @ 10:56 pm
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

5 comments
chasd60
chasd60

Q. What is this new car sales tax deduction?

A. The American Recovery and Reinvestment Act of 2009 provides a deduction for state and local sales and excise taxes paid on the purchase of qualified new vehicles through 2009.

The Biz of Life
The Biz of Life

I know the state of MD charges sales tax (6%, I believe) on the full Kelly Blue Book value. So if you buy a car for $18,000, they would calculate tax by adding the $4500 back in. So you get to pay taxes on a base of $22,500.

Rob
Rob

Can the government apply the C.A.R.S. rebate to a customers back taxes (federal)? Stories are circulating that indeed this is happening leaving the dealer on the hook for the balance. I would like to comment on the "trade theory" posted yesterday. Under the C.A.R.S. program your actually turning your car over to the government for a $3,500/$4,500 payment. The dealer facilitates paperwork and ensures the car is recycled on your behalf. A trade-in is when someone actually sells their car to a dealer and is paid by the dealer. Under the C.A.R.S. the dealer is not buying a customers car.

Maxwells
Maxwells

If the consumers car is being "traded-in" to a Dealership, shouldn't it be treated just like any other trade-in? The dealership is the one taking advantage of the Government program by applying for and then receiving these Government checks.