Congrats for Cash-4-Clunkers auto buyers, you’re paying tax on the $4500 – should have been called TAX for Clunkers!

Thought you were getting such a great deal for those of you who bought new cars using the “Cash 4 Clunkers” program did you? You may not be too thrilled to find out that you are also being taxed on it too. Read this gem from Business Insider:

But many of those cashing in on the clunkers program are surprised when they get to the treasurer’s office windows. That’s because the government’s rebate of up to $4500 dollars for every clunker is taxable.
“They didn’t realize that would be taxable. A lot of people don’t realize that. So they’re not happy and kind of surprised when they find that out,” Nelson said.
The amusement here is how most (if not all) states compute sales tax (charged when you register the vehicle.)

When you buy a new car you pay tax on the difference between the new car’s purchase price and the trade-in you present to the dealer. This is an intentional distortion in the law that is intended to favor dealers over private-party used car sales; if you sell your used car privately the new buyer pays sales tax but you do not get the offset on the purchase of your replacement vehicle – the only way to get that is to trade the car.

Dealers use this, of course, in negotiations, effectively pocketing the sales tax – and why not? It’s a real difference to you!

But the “cash for clunkers” is not a trade-in. That’s a $4,500 check from the government, basically.

So you get nailed at least once and possibly twice. Specifically, you pay sales tax on the full vehicle price (effectively paying sales tax on the $4,500!) and what’s worse those states that tax income (that would be most of them!) might wind up counting this as income for state income tax purposes too, effectively taxing you twice.

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August 25, 2009 · Filed Under General Politics


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