Cash for Clunkers may be over, but its swath of confusion rolls on unabated. Keloland reports that South Dakotans are being told that their clunker rebates are taxable as income. “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,” says Minnehaha County Treasurer Pam Nelson. Omaha.com reports that clunker rebates are also liable for state income tax hits of $192.50 to $247.50 depending on the amount of the rebate. Nebraska city sales taxes also apply. Surely other states will be making announcements about local arrangements, but in the meantime, where is the confusion coming from? The cars.gov website’s FAQ holds the key. “Is the credit subject to being taxed as income to the consumers that participate in the program?” CARS asks itself. “NO,” is the answer. “The CARS Act expressly provides that the credit is not income for the consumer.” Unless it is. Have fun with that.
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“Is the credit subject to being taxed as income to the consumers that participate in the program?” CARS asks itself. “NO,” is the answer. “The CARS Act expressly provides that the credit is not income for the consumer.”
At the Federal level that is probably true; the IRS will not consider that to be income. Your state’s Department of Revenue, on the other hand, can do what it wants. The Feds may not want the states to count it as income, but the states are free to make and enforce their own tax laws.
In Ohio, if it isn’t taxed as income at the Fed level it usually isn’t for the state (we’ll see where the cash starved state bastards here come down on this!). I did pay sales tax on the clunker rebate, the $4,500 was taken off the bottom, after tax was figured.
I thought this was common knowledge a long time ago?
While it may be true that the rebates were always subject to state/local taxes, in that case, the web site should have said so. That was a stupidly simple thing to screw up. And don’t hold your breath waiting for the feds to fix this; kinda like when the IRS is wrong, THEY never pay YOU any penalties.
As the Duke would say: “ON TO HEALTH CARE – MOVE ‘EM OUT, YOOOOO!!”
There are two separate issues here regarding taxation and it’s not very clear:
1) Paying sales tax on the CFC giveaway – that’s a given because the CFC money comes off after sales tax is calculated on the sale.
2) Treating the CFC money as taxable income – the dealers are going to have to pay federal taxes and most likely state taxes on it; it’s still not clear whether consumers will have to pay state income taxes on it.
After reading that article, it looks like they’re talking about sales tax since the issue is coming up when the new cars are being registered.
Ain’t Federalism grand? As someone who couldn’t avail myself of the opportunity and who opposed it on principal, I’m in favor of any clawbacks that minimize the gubmint coming back to me for even more money.
edit: Although the tax ought to be on the net difference between the C4C amount and the KBB value of the clunker. Yeah, that’s right, I want to make this as complicated as possible for all the participants.
It’s great to live in a state where there is no income tax! Although with budget shortfalls everywhere, one has to wonder how long that’s going to last.
The rebate went to the dealers not the consumers. THe dealers voluntarily (and some less so) reduced purchase prices. Any tax due would be paid by the dealers.
In King County, State of Washington, vehicle sales are taxed at 10%, which is higher than the general sales tax. At the state level, actual sales prices are not used.
What they do is add in amounts that were never paid, such as rebates and discounts of all kinds, to arrive at a “phantom” sales price, which is amount used for calculating sales taxes. There is little doubt in Washington State C4C buyers will be hit with $350 or $450 tax bills.
Meanwhile, back in the state capitol Olympia, car dealers are screaming to be able to better compete with Idaho car dealers by overthrowing the maximum limit of $55 of vehicle paperwork fees, enacted a few years to end the customer ripoff of $350 or more to mail off the registration form.
If you see no connection between overcharging customers in Washington State with auto sales in Idaho, you are overqualified for a legislative position in the state.
WetWilly is correct. The two linked articles are not about income tax at all. Rather, the issue is how sales tax is calculated. It appears some states are basing it on the sale price of the car plus the voucher value.
Unless you get a 1099 (or similar) in the mail, I don’t see how it can count as income.
Are “rebates” handled the same as a “trade-in”? Trade in value is subtracted from the purchase price of the new car. Sales tax is then calculated from the difference. It’s difficult to see how CfC could be considered “income” by federal or state laws unless the amount you received was more than you paid for the car. Then, additional value would be capital gains rather than wages.
Any CPAs out there?
Twotone
Just one more niggling detail that wasn’t addressed in the big rush to turn the government (with our money) into the sugar daddy to all Americans.
If you’d like the final word on this subject, you simply have to see the professor.
http://taxprof.typepad.com/taxprof_blog/2009/08/tax-for-clunkers-1.html
This is entirely a state-by-state issue. I can tell you from personal experience that in Maine, the C4C rebate (any rebate actually) is not subject to sales tax. You only pay sales tax on the amount you need to write the check for, so something like MSRP-discounts-rebates-tradein+any fees.
It is highly unlikely that it will be considered income here either. Maine just takes a percentage of the Federal taxable gross income. There are some specific add-backs, but that seems unlikely to happen for this.
I predict several lawsuits to come out of this in other states though. I could MAYBE see taxing the difference between the clunkers actual retail value and the C4C rebate as taxable income, but even that is a stretch. You did, after all, trade in a car.
Always remember that the federales (whether dim-bulb-crats or repulsicans) are not the sharpest knives in the drawer.
Politics serves as a uncreative idiot sink for those who are unusable in the creative world.
on my paperwork for my cfc deal the “price” was shown as the net price after rebates-there is no mention on the transaction documents showing the cfc or the BMW eco credit i also got just the net sales price/
sales tax was charged on the net price. I expect to pay no tax on the cfc rebate amount
In Ohio your sales tax is calculated on the price before rebates are applied. So in essence you’re paying sales tax on the rebate.
But this question is at a different level- essentially, will you be issued a 1099? And if so, who issues it? The dealer? Why? The government?
So the question is, will you pay sales tax on this free rebate AND will you pay income tax for it at state and local levels?
“Your state’s Department of Revenue, on the other hand, can do what it wants. The Feds may not want the states to count it as income, but the states are free to make and enforce their own tax laws.”
Not for long they way the Dem House/Senate/Exec are going.
Many states tax income refund checks as income. All sorts of free money is considered income irregardless of source. Even Unemployment Insurance benefits are taxable to a degree.
If you bought an Explorer 2 years ago for 2500 dollars and got 4500 under C4C you could be considered to have realized a gain of 2000 dollars. Make sure to fill out the forms and cut a check for it.
The moral of this story is there are strings attached to everything , mostly attached by politicians looking to feather their beds and please everyone.
“1) Paying sales tax on the CFC giveaway – that’s a given because the CFC money comes off after sales tax is calculated on the sale.”
Not true in California.
“According to the California State Board of Equalization, rebates paid by the National Highway Traffic Safety Administration (NHTSA) to new car dealers under the “cash for clunkers” program are considered “sales” to the U.S. government. As a result, California sales tax is inapplicable to sales to the United States or its instrumentalities.
The portion of the gross receipts from the sale or lease of a new vehicle paid by the NHTSA by the use of the rebate is a nontaxable sale to the United States.”
http://www.speedtax.com/blog/2009/07/30/california-provides-sales-tax-guidance-on-cash-for-clunkers/
Each state had the ability to make its own decisions visa-vis state and local sales tax treatment of the C4C money.
Edward’s blog post is fundamentaly in error. Nebraska has ruled that the portion of the new car sales price paid for by the federal government is taxable with regard to SALES taxes. The Omaha.com article says absolutely nothing about INCOME taxes. There is no conflict with the official cars.gov FAQ, which FAQ talks about INCOME taxes, not SALES taxes. Different states treated the sales tax question differently.
California does treat auto maker rebates as a taxable portion of new car sales. Here is the official California press release on this topic: http://www.boe.ca.gov/news/2009/66-09-G.pdf
@GS650G
Income tax refunds are taxable (usually only if you itemize deductions, but every state is different for state income tax) because it is money you generally did not pay tax on in the prior year. It is a refund of money that was withheld from your paycheck to pay your taxes, and the entire withheld amount is a tax deduction, not just what you actually paid in taxes. Thus you never paid taxes on it.
Example in round numbers:
$50,000 Gross income for the year
$10,000 tax withheld, deducted on Fed Schedule A
$40,000 Taxable income
$8000 Tax on Taxable Income
$2000 Refund ($10000 withheld – $8000 owed)
As you can see, you never actually paid tax on that $2000, so you pay it in the year you get the refund, which is usually the next year.
I used to do this for a living, sadly enough.
I’ve always found the whole concept of a manufacturer rebate in the car industry a little wierd. Realistically, it’s a discount. It’s not like you pay full retail and then send away some proof of purchase and get a check in the mail.
“I’ve always found the whole concept of a manufacturer rebate in the car industry a little wierd. Realistically, it’s a discount.”
Sales tax wise, customers are better off when these things are structured as factory-to-dealer marketing incentives, which is done sometimes. Those incentives normally just show up as a dealer discount off MSRP and are not taxable for sales tax purposes like rebates are in many states.
@krhodes1
Poor example I used since one represents production (wages) and the other helicopter cash drop money (C4C cash)
I would not be surprised to see states tax the C4C benefit retroactively. Connecticut is proposing a retroactive tax on those evil people that make over 500K a year, back to January 1.
That works once then they leave the state. Ask New Jersey, CA, and NY about departures.
The actual dollar amount of taxing C4C is minuscule but the idea is to lay precedent for any other big bailout checks to consumers, like mortgages. Forgiven debt is still considered income from what I understand if you benefit from it.
But I’m not a tax professional thank God so consult yours for advice.
That Omaha.com link you quoted says “state SALES tax” and city SALES tax it says NOTHING about state INCOME tax:
LINCOLN — Beware, Nebraska taxpayers: You will be getting a final “clunk” on your tax bill after turning in your clunker vehicle for federal cash.
Nebraska law requires including the value of such third-party rebates in the purchase price of a new vehicle for tax purposes.
Thus, Nebraskans must pay sales tax on the value of the “cash for clunkers” voucher issued to car dealers in the federal incentive program, State Tax Commissioner Doug Ewald says.
That means $192.50 in added state sales taxes if you got $3,500 for your clunker, and $247.50 if you got a $4,500 voucher.
[emphasis mine]
Tax them!
Gas, Grass, or @$$, no one rides for free.