Is cash for clunkers taxable? Yes, no, maybe. Even though the Cash for Clunkers [1] program ended, the cash for clunkers tax is generating debate.
The cash for clunkers tax is confusing because people are mixing up three kinds of taxes: federal income tax, state income tax, and state sales tax. On top of that, it would be way too easy if all the states had the same rules. Let’s sort through the tax on cash for clunkers.
Federal Income Tax
Is the cash for clunkers voucher subject to federal income tax? No. The official government cash for clunkers [2] site states:
The CARS Act expressly provides that the credit is not income for the consumer.
State Sales Tax
Is cash for clunkers subject to state sales taxes? Maybe. It depends on where you live.
For my fellow Wisconsinites, we don’t have to pay sales tax [3]. The Sales Tax Connection is keeping an updated list of states at Cash For Clunkers – Taxable or Not? [4]
State Income Tax
Is the cash for clunkers program subject to state income taxes? Hmmm. Here’s where it gets a little fuzzy.
Of course it will depend on where you live, as each state has their own income tax laws. Many states base taxable income on the federal income, which we already stated will not include the cash for clunkers. The cash for clunkers program also states that the voucher will be excluded as income for all state benefit or assistance programs.
While we could assume that those rules lead us to the conclusion that the program is not subject to state income tax, I’m never one to assume anything when it comes to taxes!
To help us draw the correct conclusion, some states are explicitly stating that cash for clunkers will not be taxable income in their states, including Arizona [5] and Nebraska [6].
Unfortunately, I haven’t found anywhere that is consolidating the answers to the state income tax question. If you find a source, let me know!
More Cash for Clunkers tax information: