Origins: People are often surprised to find out that zero-cost items (e.g., prize winnings, free goods offered as marketing promotions, items given as gifts) may not require any immediate outlay of money, but they frequently do
One group recently caught by such a surprise was some consumers who took advantage of the federal government's CARS program (commonly known as "Cash for Clunkers"), which offered incentives of up to $4,500 to those who traded in qualifying "clunkers" and purchased new vehicles. Although incentives received through participation in the CARS program are not taxable at the federal level, residents of some states may have to pay some form of state and/or local taxes (such as excise or sales taxes) on the value of the incentives. Residents of Maryland, for example:
"We treat that $4,500 as a down payment toward [the] car. We still tax the total value of the car," says Caryn Coyle, a spokeswoman with the Maryland Motor Vehicle Administration,
And you can't, say, travel up to Pennsylvania to buy your new car there to avoid the Maryland excise tax. States have pacts with one another to collect taxes owed on car purchases by residents in other states, Coyle says. So a Pennsylvania dealer would have charged the Maryland excise tax anyway if [the car had been bought there].
If it's any consolation, there's no federal tax on the clunker incentive and you may be able to deduct on your federal tax return any state or local taxes paid on a new vehicle purchased this year from
State Tax Commissioner Doug Ewald says he's received a number of complaints since the program started, but officials anticipated the issue and made sure that dealers knew about it beforehand.
Nebraska law treats the government's clunker rebates as a "third-party rebate," so they don't reduce the taxable value of the new car like a
So someone buying a $25,000 vehicle with the $4,500 clunker rebate would still have to pay taxes on $25,000.
"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," [Minnehaha County Treasurer Pam] Nelson said.
As an example, if you bought a car with a $20,000 price tag and the dealership gave you $3,000 for your trade-in, then you got the $4,500 Cash For Clunkers incentive, you paid $12,500 for the car. That's the amount you've paid plus 3% as the standard Highway Use Tax. Hence, you are not paying taxes on the $4,500.
The North Carolina Department of Revenue says because the incentive is taken as a coupon at the dealership, you will not have to file it as income on your taxes.
Last updated: 29 August 2009
Ambrose, Eileen. "Cash for Clunkers, But No Tax Break in Md." The Baltimore Sun. 4 August 2009. Neisteadt, Shawn. "Some Surprised by 'Clunker' Tax.'" KELO-TV [Sioux Falls, SD]. 24 August 2009. Zash, Chelsi. "Can the Cash for Clunkers Incentive Be Taxed?" WFMY-TV [Greensboro, NC]. 24 August 2009. Associated Press. "Neb. Clunker Buyers Still Pay Full Sales Tax." Newsday. 21 August 2009. WJRH-TV [Tulsa, OK]. "Is Your Tax for Clunkers Taxable?" 21 August 2009.