Jul 30th 2009
On June 24, 2009, President Obama signed the Consumer Assistance to Recycle and Save Act of 2009, commonly known as “Cash for Clunkers.” Car dealerships that register for this voluntary program will receive vouchers for qualifying trade-ins on the purchase of new vehicles where the fuel efficiency of the new car exceeds the fuel efficiency of the trade-in by specified amounts. The voucher amounts will be $3,500 or $4,500, depending on the increase in fuel efficiency, and are to be treated as the down payment on the purchase or part of the down payment. The Act is effective for purchases made between July 1, 2009, and November 1, 2009. (However, there is a maximum of $1 billion. Thus, the program will end the earlier of November 1, 2009, or when the appropriation runs out.)
How the vouchers work
Dealers who register for this Car Allowance Rebate System program will receive vouchers of $3,500 or $4,500 if they agree to certain terms. Chief among those terms is that the voucher must be used to offset the purchase or lease price of a new fuel-efficient automobile upon the surrender of an “eligible trade-in vehicle.” Eligible new vehicles include passenger automobiles and certain trucks; however, this discussion will be limited to automobiles.
A $3,500 voucher will be issued for an automobile if the new vehicle has a combined fuel economy value of at least four miles per gallon higher than the value of the eligible trade-in. A $4,500 voucher is issued at ten miles per gallon or more.
The term “combined fuel economy” means the amount on the label that is required to be affixed to automobiles.
No more than one voucher may be issued for a single person.
Eligible trade-in vehicle
There are a number of requirements for an eligible trade-in vehicle:
· It must be in drivable condition;
· It must have been continuously insured consistent with applicable state law and registered to the same owner for a period of not less than one year immediately prior to the date of the trade-in;
· It must have been manufactured less than25 years before the date of the trade-in;and
· It must have a combined fuel economy of not less than 18 miles per gallon.
In addition, the dealer must certify that he or she will not sell or otherwise dispose of the trade-in to be used as an automobile in the United States. In addition, the dealer must certify that the trade-in will be crushed or shredded (however, the dealer may sell certain parts under certain circumstances).
In effect, this means that the voucher is in lieu of any trade-in value. Thus, the only eligible trade-ins are those that are both drivable and nearly worthless as trade-ins, while meeting other requirements.
You can go to the Car Allowance Rebate System eligibility guide to see if your clunker and your new car qualify for the rebate.
New vehicle requirements
In addition to meeting the requirements for gas mileage improvement, the new vehicle must get at least 22 miles per gallon.
The law specifically allows the voucher in combination with other federal, state, and local incentives. As such, a buyer can get a tax credit for purchase of a hybrid in addition to a voucher.
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EXAMPLE: Tim has a 1990 Chrysler that barely runs. It is rated at 18 MPG, but Tim says he only gets about 10. He could sell it for $1,000 — maybe.
Tim trades the car in for a brand new Ford Fusion hybrid which gets 39 MPG with a purchase price of $30,000.
The purchase is eligible for a $4,500 Cash for Clunkers voucher, which is used as the down payment. He is also eligible for a $1,700 hybrid credit on his 2009 tax return.
Thus, the car really cost him $23,800 ($30,000 - $4,500 - $1,700).
The replacement auto must be new, meaning that the equitable or legal title has never been held by any person other than the ultimate purchaser. It must have a suggested retail price of $45,000 or less. Both purchases and leases qualify, but a lease must be for at least five years.
Under the Act, the voucher is not treated as gross income of the purchaser for federal income tax purposes (it is gross income to the dealer). Not all states will necessarily conform for state income tax purposes. (However, under Act §1302(h)(1), the voucher amount is not to be treated as income for purposes of “assistance and benefits” under any federal or state program.)
Earlier in the year, Congress added another incentive to purchase a new car: the sales tax deduction on new car purchases. Under the Cash for Clunkers program, a taxpayer may lose a bit of the sales tax deduction. Some states charge sales tax on the sales price and some on the sales price net of the trade-in.
Since the voucher is meant to substitute for the trade-in, those states will, presumably, charge sales tax on the amount net of the voucher.
To summarize, you must have a car that:
· You’ve owned (and insured) for at least a year;
· Is no more than 25 years old and has an MPG rating of at 18 or less; and
· Is in drivable condition.
To make it worthwhile, its trade-in value has to be less than the voucher amount (otherwise, you’dbe better off with the trade-in value). Finally, you must want a new fuel-efficient vehicle.
It all seems so unlikely and restrictive. However, consider the following:
· There is nothing to prevent you from trading in an old clunker and giving the new car to another person, such as a child or grandchild; and
· There is nothing to prevent you from financially helping another who owns an old clunker to purchase a new car.
As such, parents and grandparents are likely candidates. Note, however, the new deduction is for sales taxes paid on a new vehicle, the “original use of which commences with the taxpayer.” It is not clear whether the deduction would be denied to an individual who purchases a vehicle for another.
EXAMPLE: Junior Jones owns an eligible clunker. Grandma Jones wants to help him get a new car. Junior trades in the clunker for a new car that qualifies for a $4,500 voucher. Grandma Jones ponies up the rest of the purchase price plus the $1,500 sales tax. She cannot take the deduction for the sales tax on the purchase of a new car because she didn’t own the car.
EXAMPLE: Grandma Johnson owns an eligible clunker. She trades it in for a new car and qualifies for a $4,500 voucher. She also pays sales tax of $1,500. She uses the car for a short time and then gives it to Junior Johnson. She may deduct the sales tax because the original use of the vehicle began with her.
About the author:
Tim Hilger, CPA, is with Spidell Publishing, Inc., publisher of the Elder Client Planner, a monthly publication covering tax, legal, and financial issues facing retired and retiring clients. Each month, readers get analysis of issues that directly relate to aging clients, citations to keep abreast of changes in tax law, Social Security laws and procedures, and new good, bad, and ugly investment opportunities that affect their clients.