Cash for Clunkers Rebate Is Not Taxable to Buyers

There is a rumor going around about the Cash for Clunkers rebates being taxable as income for buyers. Is this rumor accurate? The answer is unequivocally no.

The Cash for Clunkers program was designed to provide a shot of adrenaline to an otherwise morbid car market. The summer of 2009 was a period when people were very worried about the future. When Americans get worried, they do something very unusual – the save their money. Americans actually saving money! Who would’ve thought it possible!

While saving money is a good move in the long term, it didn’t exactly help with the Great Recession we were going through. Nobody was buying cars and otherwise sick car companies were quickly facing the end of the line. To generate demand, the government invoked Cash for Clunkers. The basic pitch was you could trade in your old clunker and get a $4,500 rebate on a new one. The program generated massive sales and bought some time for the auto industry.

There is now a nasty rumor going around the web that the Cash for Clunkers program was just another government initiative to steal your money. The basic pitch is the $4,500 is viewed by the IRS as income to the people who purchased cars under the program. As a result, they must pay income tax on the $4,500 on their 2009 taxes.

The basic logic of this rumor is absolutely true. The $4,500 would usually be viewed as a gain by the IRS and those buying cars would have to pay income tax on it. This, however, was not a usual program. This “tax logic” can be overturned when Congress includes a specific provision in the legislation indicating the rebate/credit will not be taxable. That is exactly what happened here. Congress included the provision. People who bought cars under the program will not have to pay income tax on the $4,500 benefit they received.

Is this the end of the story? Not really. Most car dealers assumed they would also get a break on taxes. No such provisions were written into the legislation in question. As a result, dealers do have to pay taxes on the profits they derived from the program. Better them than you!

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