It’s Fix the Tax Code Friday!
Buoyed by the popularity of the Cash for Clunkers program – and the perceived success of the First Time Homebuyer’s Credit – Congress is considering whether to extend both programs in 2010.
Various bills suggest extending the homebuyer’s credit from six months to a year – and even increasing the amount of the credit to $15,000. And as China, France and Germany each consider extending their version of the Cash for Clunkers programs, some members of Congress are thought to be eying a second version of the plan.
So today’s Fix the Tax Code Friday question is:
Should Congress extend the first time homebuyer’s credit or re-introduce the Cash for Clunkers program? Both? Neither? Speak up, I can’t hear you!
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.
Have a question? Ask the taxgirl! – Now on Facebook at http://www.facebook.com/taxgirl
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CARS
Taxpayer asks:
Hi,
I heard a car dealer on a radio talk show say that if the consumer owes any federal or state taxes when they buy a C4C car, the dealer is on the hook to get reimbursed by the consumer or eat the difference, because the federal payment will take out the arrearrage before sending out the rebate.
True? And if so, where can I find this in written form? (I am trying to write an article on C4C, but this piece of info is elusive.)
Thanks,
Taxgirl says:
I haven’t heard anything about that. And I don’t believe that it’s true – for a couple of reasons.
One, the paperwork is submitted by the dealer to the NHTSA, not the IRS and definitely not to the state revenue department. In fact, the NHTSA goes out of their way in the rule to note that they are not experienced or authorized to deal with taxes.
Two, the rebate is payable to the dealer, not to the individual. The dealer provides the discount at sale, not at reimbursement. If rebates were subject to tax checks, dealers would be essentially become responsible for collections of back taxes. That would be messy and cumbersome – not to mention the number of privacy issues involved.
Three, the rule (which you can read in its entirety as a pdf here) clearly states:
For a purchaser, a dealer must collect individual or entity name, address and State or corporate identification number (e.g., driver’s license number, State identification number, corporate tax identification number). This information is used to verify the identity of the purchaser and to confirm no prior participation in the program.
In theory, then, you could simply provide your name, address and license number. That’s not enough information to run a tax check instantaneously. I mean, the IRS database is good, but it’s not that good.
I think this is either a dealer who doesn’t know what he’s talking about or a scam. I’ve seen a couple of sites (Texas’ Police News is one) that has warned folks away from scams that require “pre-registration” or the release of extremely personal information for the CARS program.
If you’re concerned about what appears to be a scam related to the CARS program, contact the Office of the Inspector General at the U.S. Department of Transportation at (800) 424-9071 or by e-mail at hotline@oig.dot.gov.
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.
Have a question? Ask the taxgirl! – Now on Facebook!
Taxpayer asks:
Earlier this year, I agreed to co-sign on a loan for my adult son for a new car so that he could get to work. He made the first payment and has not made payments since. I have made all of the other payments.
I have 2 questions:
Since I really bought the car, can I claim the deduction on new cars this year?
If I sell the car for less than I paid for it, can I claim a loss?
Thanks for your time.
Taxgirl says:
Okay, I’m going to make a pretty big assumption here. I’m going to guess that you merely co-signed on the loan for the car but your name is not on the title. Co-signing for a loan doesn’t give you ownership rights in the car, even if the primary signer defaults. That’s one of the tricky bits about co-signing. You’re guaranteeing the loan, not buying the car.
If you didn’t actually buy the car – meaning that you don’t own it – you would not not be entitled to the new car sales tax deduction.
If you were to sue for ownership of the car (which I imagine that you’re not inclined to do), I still don’t think you’d qualify for the deduction. At that point, I don’t think you could argue that “the original use… commences with the taxpayer” which is the criteria for the deduction.
If, however, your name is on the title, then I think you would be entitled to half of the sales tax paid as a deduction. I haven’t seen any documentation on this yet but it would seem to me that if the car otherwise qualifies, and you own half of the car, you would be able to claim a portion of the deduction (if any of my colleagues have seen this matter addressed, by all means, chime in!). But I’m guessing that’s not the case here since co-signers rarely appear on the title and since you mentioned that your son made the first payment (it sounds like you meant for him to own the car outright).
And I’ve got more bad news: you can’t take a capital loss on the sale of the car, either. Even if you eventually take ownership of the car and sell it for a loss, there’s no capital loss treatment for the sale of “personal use property” – that includes houses and cars.
Perhaps you can save yourself some agita and work out a payment plan with your son to repay the money that you’ve paid on his behalf? I hope it all works out.
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.
Have a question? Ask the taxgirl! – Now on Facebook!
