Geisking Public Relations - Public Relations Specialist
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Is clunker cash taxable income
Rick Weaver,
Detroit Business Development Examiner

Controversy has begun on radio and blog sites concerning the cash given for clunkers and its tax impact. The Car Allowance Rebate System (CARS), more commonly known as ‘Cash for Clunkers,’ provided $3,500 to $4,500 for upgrading lower gas mileage vehicles for substantially higher gas mileage. 

Reports have surfaced stating the rebate would be taxed as normal income. Many that took advantage of the program have become concerned as the tax could be in the four figure range, depending on overall income. 

Your Detroit Business Development Examiner has discovered the rumors about taxes are both true and false. 

The rumor is true -- and false 

According to the government’s official rebate information site the rebates are explicitly exempt from federal income tax.  

However states are free to tax the income. This fact provided the source for the rumors to begin. In South Dakota C4C buyers discovered the state was taxing the rebate when buyers registered their new cars. The SD tax collection was reported by several news organizations -- and then the blogosphere. 

Rumors were given a degree of credibility by an element of truth. When the second C4C funding was passed the bill stipulated the C4C cash was taxable -- as business income. This applies only to business taxes paid by dealers. Some dealers protested as the first funding bill gave dealers the impression the income was tax free for them also.

States are exercising their tax sovereignty in varying ways. In Michigan there are no specific state tax advantages. 

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