I made the mistake yesterday of sharing a link with Twitter followers indicating the Cash for Clunker rebate would be treated as taxable income. Astute followers quickly pointed out that the link I shared was from a site spreading a false rumor about the Cash for Clunkers tax implications for buyers.
Instead, I should have checked out the C.A.R.S. government-run site, which provides the following answer to the burning cash for clunker tax rules question:
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.
While I wasn’t fond of the Cash for Clunkers program from the get-go, I concede that it spurred on many more sales than I expected. In fact, it might be the first program with any real stimulative effect since the passage of over a trillion dollars in bailouts and stimulus packages.
It seems Americans are always up for a $4,500 rebate. However, the suspicious consumer in me wondered if the manufacturers suggested retail price (and dealer price) didn’t go up in advance of the deal. After all, an increase in consumer buying power, especially when generated artificially as in the case of a government rebate, is often followed by higher prices.
I also wondered if consumers would be trading in cars for a rebate when they could have received much more money via a private sale. But that is always a risk when trading in a car at a dealership. The dealer is not going to give you top dollar because he has to leave a little room to make that when he resells the car (not a problem under Cash for Clunkers since they were ordered to be destroyed) he turns a small profit, or at a minimum breaks even.
Debt is also a concern. How many people trade in a paid-for clunker for a shiny new car with a big auto loan? It might be better for the environment, but is it better for your family finances? That remains to be seen. Might be a good time to be in the repo business, though.
All this is water under the bridge now, as the Cash for Clunker program ended Monday night. However, it sure would have been quite the surprise to learn Cash for Clunker tax rules meant the rebate you received was treated as taxable income. From my web research, it sounds like there still may be an issue for dealers, and even buyers may not be completely out of the woods when it comes to state taxes on Cash for Clunkers. At least it appears Cash for Clunkers will not negatively impact buyer’s federal taxes.