Several blogs have posted that the recent “clunker” rebates are taxable.  Right Wing News writes, “Yep, you read that right. In many states car buyers that turned in their “clunkers” for up to $4,500 off the cost of a new car are finding out that they have to pay state sales tax on the $4,500 too. And still others just might find out next year that they’ll have to pay income tax on that “free” government money. “

It’s true that the clunker money is subject to sales tax in most states.  The government’s official website for the CARS program clearly states in the FAQ section that the CARS credit may be subject to sales tax and encourages customers to check the laws in their state or to consult with their tax advisor. 

Why is the clunker money taxable?   The clunker credit is a REBATE.  Rebates, by definition, come off the bottom line – after taxes have been assessed on the selling price of the car.  The cash rebates offered frequently by the car manufacturers work the same way.  So do rebates on other products like soda, toilet paper and refrigerators.  Look at your grocery store receipt the next time you use a rebate coupon.

Perhaps the confusion stems from the fact that most people perceived the clunker money as a trade allowance instead of a rebate.  In most states, the sales tax on a car is assessed on the sale price minus the trade allowance (the amount the dealer gives you for your old car).   For example, if you purchased a new car for $20,000 and traded in your old car for $4,500, you would only pay sales tax on the difference of $15,500.  With the clunker rebate, you pay sales tax on the full $20,000, and THEN the $4,500 rebate is applied. 

The claim that consumers will have pay income tax on $3,500 or $4,500 rebate is completely FALSE!  The official CARS government website explicitly states that the CARS credit is NOT considered taxable income for the consumer.  It is, however, considered part of the dealer’s gross income.

Unfortunately, some blogs are spreading mis-information about the clunker program in an attempt to schmear the current administration as well as bash the car dealers.   Politics aside, I hope this post sets the record straight and eases people’s minds about the clunker money and taxes.