Ask The Taxgirl: Tax Consequences Of CARS

Taxpayer asks:

I heard on the radio that we will have to pay taxes on the money from the Cars for Clunkers. If so, I am really mad because nobody said we had to pay taxes on it. Is this true?

Taxgirl says:

A number of web sites and um, what’s the word, liars opportunists political wonks media personalities, have indeed taken to the airwaves to try and stir the pot a little with respect to the CARS program. It certainly gets attention to scream that the program is some kind of secret tax-raising scheme. Only, they’re wrong.

As reported earlier, individuals who participated in the program do not report the rebate on their federal income tax returns. Think of it as a sale or discount: $4500 off! It’s not income to you, period.

Dealers are required to report the reimbursement from NHTSA as part of their gross income. This makes sense – they’re still grossing the same amount after the reimbursement. For example, if a dealer sells a $25,000 car to a customer for $22,000 ($25,000 less the CARS “discount” of $3,000), and the dealer next receives a check from NHTSA for $3,000, the dealer has still grossed $25,000. No harm, no foul. There’s no “extra” tax on the dealer, as has been reported. It’s the same reporting requirement as before.

But what about sales tax? I’ve heard a bunch of folks arguing this both ways. Most states are not including the CARS portion for purposes of sales tax; there are a handful of states that are taking the position that the entire sale price, including the CARS portion, is subject to sales tax. You can check out which states using this handy chart from Lexis. I doubt you’ll be surprised: it’s more or less the usual suspects. The good news? If you live in one of those states, you can take advantage of the new car sales tax deduction.

I hope that clears things up!

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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4 thoughts on “Ask The Taxgirl: Tax Consequences Of CARS

  1. I think the context of “paying tax” was missed, Tax Girl. The Tax For Clunkers program is a Federally funded program. Therefore these monies will be payed back the the Fed. by taxes assessed to United States tax payers as a whole, just like any other Federal program. There, now its clear how everybody pays.

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