Cash for Clunkers Taxable Income?

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.

Additional Resources:


  1. I fail to see the logic or morality of the cash for clunkers program. It just seems like a reward to people who had the bad sense to buy gas guzzlers. Now I see they are being doubly rewarded: once with the cash, and twice with the nontaxability.

    Meanwhile, I cannot afford to trade out my 10 year old Honda. At least it’s not a gas guzzler (but I don’t do much driving anyway).

  2. A clunker is, in my mind, an old, decrepit vehicle, one barely able to travel from A to B anymore, not a 5 year old Honda Accord (or whatever).

    My Toyota is 28 years old (and still runs beautifully), yet doesn’t qualify as a ‘clunker’ & therefore has zero trade-in value because it’s…TOO OLD to be a clunker!? I find this bizarre. What exactly do people consider “clunkers” these days anyway?

  3. I did participate in the program but because I was in a tough spot. I was will to keep driving my 97 Izusu Rodeo for a few more years but the frame was rotted out and it would not pass inspection again.
    That being said I had a heck of a time finding a dealer that was willing to move off the MRSP. In fact some of the dealers had even jacked that up.
    I was frustrated but I found a Subaru dealer that took $2000.00 of the real MSRP. So I ended up with a 2009 Subaru Forester for just under $16000.00 with the low financing that they were offering.
    Again its not what I wanted to do per se but I had to buy something to put my family reliable to put my family in.

  4. I’m glad I’m not alone in the world thinking this whole ordeal was silly. I had to listen to a lecture from a family member that families with children on CHIPS should have their children removed, because obviously they can’t afford to provide for them. Cash for Clunkers however, we need that. /sarcasm

  5. I drive a 10 yo car and did not participate in this program. It amazes me that someone would spend $350000 to save $4000. I’m sure they did not pay cash for this and now have car payments for 5 yrs. The interest will likely wipe out any savings from the program.

  6. My problem with the program is twofold. Like Marsha, I think it rewards people who were buying gas guzzlers all these years when we knew they were bad on so many levels. Also, we should stimulate the economy with jobs that build long-term infrastructure, not jobs that produce consumer goods which encourage more personal debt and continued waste of resources.

  7. Glad to see that a few other folks saw through this one. This always seemed like a thinly vailed attempt to boost the auto industry with tax dollars – again. Not sure what was worse – the way they did it under the guise of environmentalism or the fact that most went deeply into debt to do it.

    The worst part is that it is once again, an artificial boost. Except this one will bring folks back to work, but for how long? Laid off again in a month?

  8. The big question in my mind is will the spike in demand for cars turn into anything other than a very short term spike in employment and demand for cars. I think we will look back on this as another failed gov’t idea to create jobs by redistributing money in a way that doesn’t do anything long term. Additionally, one consequence has been for low end used cars to go up in price. This hurts the very people that most need help now – lower income people that need good low end used cars. Some folks certainly took advantage of this program that were in real need of a new vehicle and I’m glad those folks could get some help, but how many people that took advantage were like me – above average income, driving a paid for 8 year old car with a 100K in mileage had I traded it would have netted about $1000 more than normal? So in essence money was transferred from taxpayers to many folks that didn’t really need it while hurting those folks that most need less expensive used cars. Typical gov’t program if you ask me – more unintended bad consequences than real long term results.

    I will add one more comment – as we look to be more frugal people, please keep an eye on what DC is doing – they are being anything but frugal and in March Social Security went into deficit spending mode – more being paid out than is coming in – and it is 10 years earlier than projected. So our broke Federal gov’t – spending $2 for every $1 coming in – is going down the same path as many of us did in the past – spending way more than we should and using debt to pay for it. You know that is unsustainable. Please contact your representatives and ask them to get w/ the frugal movement – if not for you sake than for your kids.

    Be a Fiscal Conservative – no matter what your politics are. It is the only sustainable model.

  9. The Cash For Clunkers program is one of the WORST programs ever. If you have a $4,000 dollar beater, you have no business trading it in for a 20-25,000 car (avg price of an american car)!

    Unfortunately, 691,000 people did so, and they just went that much more in the financial hole.

  10. Heard a lot about cash for clunkers.Anyway, thanks Mary for the youtube!Now i understand it

  11. The federal government is deeply in debt to a totalitarian foreign government, but it continues to borrow – so tht it can bribe Americans to go further in debt while turning over valuable assets to be destroyed. That might make sense to me if I hit myself on the head with a hammer a few times, or if I got elected to Congress, but as it is, it seems absurd.

  12. Cash for clunkers created a bottle neck.

    Once it was announced, dealer sales dried up. Nobody wanted to buy until the details were confirmed. The problem is, the sales which should have been happening prior were stalled and the sales which should have been happening later were pushed forward.

    The only way to truly gauge its success is to watch the future of car sales and reposessions. I would predict sales will dramatically decrease while repos will spike.

  13. What Joe said – that’s exactly what I was going to say. We might have temporarily stimulated the economy, but how will sales be in the next few months? And hopefully everyone who bought a car can afford to keep up with the payments. Sometimes people don’t realize their insurance is going to skyrocket now that they have a brand new vehicle. I also found it terrible that perfectly good cars were destroyed.

  14. Cash for clunkers had a lot of “unintended consequences”. It took business away from auto repair shops, parts stores, used car dealers and car donation charities. Plus, it destroyed 700,000 cars that ran, many of them were in good condition!

  15. That which you subsidize, you get more of.

    As a nation, we’re committed to subsidizing debt and over-consumption.

    In fact, we’re so committed to doing so that we’re willing to go into debt to do it. This puts it in the same category as foreign war and entitlement spending: something we’re just unwilling to give up or consider reducing.

    This means it’s unrealistic to suspect that the deficit spending will continue to increase, and that the national debt will continue to grow. As with all other nations that have started down this path and not corrected it, we are very likely to spend our way not only into insolvency but into bankruptcy.

  16. I will be the first to admit I do not check every link I post on twitter. This is usually when I RT (re-tweet) people. For the most part I do check them, but I can see how a “bad” link could get by. Perhaps you just glanced at hte page and didn’t read it in-depth and see if it was false information or not.

  17. I’m with #1 Marsha.

    As we sat in my car, I had a frugally challenged business associate tell me I should Cash for Clunkers my car– I chuckled and said this car gets 35 MPH– Are you out of your mind?

    Silence . . .

    (That same associate recently admitted the $1,200/mth car payment he has on ONE car was a big mistake! No typos– $1,200– one car)

  18. I understand this “Cash for Clunkers” was first conducted in Europe and was a great success. The US had even met with Germany for advice before starting it up here in the US.

    The European programs “success” may be the fact they required purchasing locally built cars to stimulate “their” own economy and not the Worlds. What also helped keep their economy going was their old “clunkers” were not destroyed like here in the US, they were resold and exported which also generated another industry and another source of revenue.

    They did things differently here so they shouldn’t expect to see the same results.

    President Obama is now going to learn first-hand why so many people were driving these “clunkers” in the first place. It was all they could afford!

    Getting people a $4,500 down-payment only got them qualified enough to get out of the Dealerships front door.

    And within 3-months, reality will sink-in and these people are going to be struggling to make New Car payments and much higher insurance premiums then they’ve ever seen before.

    And with no supply of cheap “clunkers” around, it will be very difficult for these same people to ever secure their own payment-free transportation again.

    On the upside, it will create many New ‘Repo’ jobs, albeit temporary ones but still more jobs.

    I’m sure President Obama will have another well thought-out program just ready to go, to undo the damage from his last one(s).

  19. Three in my extended family traded in. Two just finished pharmacy school and one of the struggling families. All bought new with payments- but what they bought was in the 12,000. range- so their payments will be gone before the car is old. I think it was better to give money this way than simply give money.
    They should have done it BEFORE they bailed out GM- just to have it fail.

  20. I traded in my 93 F150. It was worth $1,200. I got $4,500 for it. It got about 14mpg combined, and probably would have needed about $2,000 in repairs in the next year or so (it was my daily driver). I now have a new Hyundai Elantra Touring that is averaging about 31 mpg, and has a 5 year/60,000 mile all-inclusive warranty. I paid $12,300 after all taxes, tags, fees (sticker price was $20,000).