Cash for Clunkers Tax Rules

August 29, 2009 by Jim

age of the Cash for Clunkers program to buy yourself a brand new vehicle, you might be wondering about how you deal with the taxes involved in getting that $3,500 or $4,500 voucher. The IRS isn’t in the business of letting you get something for nothing!

Federal Taxes

You might be surprised to learn that there are no federal tax consequences. The IRS does not consider the voucher as income so you won’t need to pay any taxes on it. You can also take advantage of any State and Federal tax incentives for buying hybrid vehicles, the Cash for Clunkers voucher doesn’t cancel that out (something the dealer probably told you if you purchased a qualifying hybrid vehicle). For a full list of those vehicles, as well as how much of a credit you receive, visit Fueleconomy.gov’s Energy Tax Credits for Hybrids page.

State & Local Taxes

You may have to pay taxes to the state or local government on the tax voucher though. For example, in Maryland, you pay a 6% sales/excise tax on the price of a car when you register it. If you purchased a car with a voucher, you have to pay the 6% tax on the full purchase price of the vehicle including the voucher. So on a $3,500 voucher, Maryland residents pay $210. On the $4,500 voucher, Maryland residents pay $270. The voucher is not recognized as income in the state of Maryland, but you still pay taxes through sales tax.

I hope that clears up any tax questions you may have had associated the Cash for Clunkers program!

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