Does Cash for Clunkers Affect Your Taxes?

The Cash for Clunkers program ended on August 24th. So now you’ve traded in your clunker, gotten your new car and now you’re thinking about next year’s tax season. Are Cash for Clunkers vouchers taxable? Will the program affect your taxes, like the first-time homebuyer credit? Will you have to pay sales tax on the full price of your car or just on what you paid?

Are Cash for Clunkers Vouchers Taxable?

Not federally, the vouchers are not being taxed by the Federal government. Because the government has the car destroyed, the car salesmen aren’t getting anything out of the trade-in. When you use the Cash for Clunkers program, the vouchers take the place of the trade-in.

As a rule, a Cash for Clunkers personal car sale is no different from a regular one. Only, in this case, the trade-in value is being paid for by the government and is determined by different factors and possibly higher.

No Federal Taxes, What About State Taxes?

Since states normally use the numbers on your federal tax return as a basis for your state tax return, it’s unlikely that most will be taxing the CARS voucher as income. To be helpful, some states are stating explicitly that they won’t be taxing the voucher. I haven’t been able to find a place that lists all the states positions on it, but will update the page if I do.

If you’re concerned about it closer to tax season, consult a local CPA or tax attorney or check your state comptroller’s website for information.

Probably No State Taxes, What About Sales Tax?

So what about sales tax and Cash for Clunkers? Sales tax is the most pertinent, since the voucher will affect the price of the sale. Will you pay sales tax on the full price of the vehicle or will you only pay sales tax on the part that comes out of your pocket?

Fortunately, the Sales Tax Connection is keeping an updated list of which states are charging Cash for Clunkers Sales Tax and which aren’t. Not all states have reported in yet, but check back if your state wasn’t included.

Does Cash for Clunkers Affect Business Taxes?

For businesses, as for people, the voucher is not treated as a source of income. Therefore, a business that traded in its vehicle would be in the same taxable situation as if it had sold the vehicle for $0.

More information on business taxes.

How Can You Get a Tax Break if You Missed the Program?

If you missed out on the Cash for Clunkers program but still have an old clunker you’d like to get rid of, check out my article on donating your car to charity.

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