Is cash for clunkers taxable? Yes, no, maybe. Even though the Cash for Clunkers 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 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. The Sales Tax Connection is keeping an updated list of states at Cash For Clunkers – Taxable or Not?

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 and Nebraska.

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:

“Cash for Clunkers” Program

As many of you may have heard, the government recently released the rules for its Car Allowance Rebate System (C.A.R.S.), also known as “Cash for Clunkers.”

The program’s goal is two-fold: to get older, less fuel-efficient cars off the road and 2) to encourage sales and leases of new cars in order to stimulate the struggling auto industry. Cash for Clunkers does this by allowing auto dealerships to offer a credit towards a new car to owners who turn in their “clunkers.”

Cash for Clunkers Features

  • Fuel Economy: To qualify for the credit, your “clunker” has to have a combined fuel economy of 18 mpg or less and your new vehicle must get 22 mpg or better. You can calculate the fuel economies of both vehicles here. Remember: the comparison should be done between the “combined” values.
  • Rebate Amount: The credit amount is either $3,500 or $4,500. It is calculated based on the difference in fuel economy between the “clunker” and the new vehicle. For cars (not trucks), if the new vehicle is 4-9 mpg better, the credit is $3,500. If it is 10 or more mpg better, the credit is $4,500.
  • Your Vehicle: To see if your vehicle qualifies, you can use the Cash for Clunkers calculator or check the eligible vehicle trade in list.

More Details

Timeline: The program applies to trades that occur July 1, 2009 or later so if you traded in a car in July and didn’t receive the credit, you may still be eligible. It ends November 1, 2009, or when the funds are exhausted, whichever comes first*.

Combining Credits: You can combine this rebate with other dealer and government incentives. The Cash for Clunkers credit can be used in addition to any other rebates that the dealerships normally offers, and can’t be used by dealers as a replacement for their usual incentives. It can also be combined with government tax credits, like the one for hybrid cars.

Taxes: This credit will not be subject to income tax. However, whether it is subject to sales or local tax or not will vary by area.

What happens to my “clunker?” The Cash for Clunkers program requires that all “clunkers” be destroyed so that they can’t be resold, though some parts may be.

Is this Program for Me?

The Cash for Clunkers program should help the United States encourage automakers and consumers to move towards more fuel-efficient vehicles. For the right consumers, it can be a great way to save money on a new vehicle purchase they were going to make anyway. However, don’t let this credit sidetrack you from still doing your research and properly negotiating the best price for your car.

In addition, those who aren’t already in the market for a new car shouldn’t necessarily now make a purchase because of this program. A car may be worth more in a private party sale or worth more to its owner than cash. For example, a 2002 Ford Explorer with 75k miles could sell for about $6k on Craigslist and, if in good shape, should last another 3-5 years without many major repairs. In either case, its value to its owner is worth more than the government’s $4,500, especially if he makes an effort to improve its fuel efficiency.

If you’re ready to buy, be sure to get a free copy of your credit report before applying for a car loan.

Will it Last?

*Because of the popularity of Cash for Clunkers program, there was mention last week that the program had used up all the funds; then the House voted to inject an additional $2 billion to revive the program. No matter what Congress does, if you make a purchase, the rebate will be honored through Tuesday, August, 4.

For more information, see the Cash for Clunkers FAQ.

The $8,000 First Time Home Buyer Tax Credit just got even better! You can now get an advance on your $8,000 tax credit at the time you purchase your home.

It allows buyers to use the tax credit for closing costs and additional down payments instead of waiting until you file your tax return. It’s great news for those of you who were planning to buy a home by November 30, 2009.

Tax Credit Advance

The advance on the tax credit will be for buyers who use FHA loans. Borrowers will also be required to make a 3.5% down payment. Borrowers who work with state and local housing finance agencies, government agencies and approved nonprofit groups are also eligible.

Cost of Tax Credit Advance

Being able to access the tax credit ahead of time, is a great idea, but it isn’t free. The Federal Housing Commissioner released a Mortgagee Letter 2009-15 which establishes a maximum on the interest rates and fees:

Any costs attendant to the purchase of the tax credit are to be nominal and discounting the anticipated credit to cover the costs and expenses of the transaction must be reasonable and disclosed to the home buyer.

In FHA’s view, fees and costs that total more than 2.5% of the anticipated credit are considered excessive. (Example: $6000 to be refunded, with all fees and costs discounted, borrower should receive not less than $5850.00 for sale of tax credit.)

Zero Down Payment?

Buyers will not be able to use the advance to fund their entire down payment. The FHA loans will still require that the borrower comes up with the 3.5% down payment from their own funds. The tax credit advance can then be applied for a larger down payment in addition to the 3.5%, if the buyer chooses.

First Time Home Buyer Details

For more information on the first time home buyer credit, see the First Time Home Buyer Tax Credit or First Time Home Buyer Tax Questions. The credit can be claimed on IRS Form 5405.

The economic stimulus plan lifted the maximums on the solar energy tax credits, making the purchase of solar panels very appealing.

Since we decided not to downsize and stay in our house long term, we’re considering installing solar panels this summer.

I thought it would be fitting to celebrate Earth Day with some details about the financial considerations behind installing solar panels!

Solar Energy Tax Credits

Federal Tax Credits. The solar tax credit is now a 30% tax credit on the installed price of solar panels and solar water heaters. Beginning in 2009, there is no maximum on the tax credit (in 2008 there was a $2,000 maximum).

The energy efficient tax credits detail all the available products and credits. In addition, if you have a home business, you can qualify for accelerated depreciation and a 50% bonus depreciation for the portion of your home that is devoted to your home office.

State Tax Benefits. You can use the map from the database of state incentives to see if your state offers grants, rebates, or tax incentives. Our state offers a cash back rewards program of 25% of the cost, with a $35,000 maximum.

Additional Financial Incentives

Beyond the tax benefits, there are multiple programs offered by the state, electric company, and government programs. Here are some examples of the ones in our area.

  • Property Tax Exemptions. Our state will exempt the solar system from property tax, which will be a nice break, since we are in a very high property tax area.
  • Energy Star Home. Because our house was green-built when we built 3 years ago, and qualifies as an energy star home, we could qualify for an additional $500 bonus.
  • Electric Company Incentives. Our electric company offers tier rates and time of use metering, which help increase the savings by going to solar power.
  • Selling Excess Energy. In addition, our electric company offers net-metering, which will allow us to sell our excess energy!

Solar Power Calculators

It’s hard to figure out the total cost of installing the solar panels, since there are so many tax credits and financial incentives. When figuring the cost, look at the total cost of the system, less the tax savings, and financial incentives. Divide the cost by the monthly savings to determine your break even points.

There are various calculators that help you determine the overall cost. You’ll want to get your average kilowatt hours of electricity from your electric company before you start. Here are some that I liked:

  • My solar estimator. This calculator, which is my favorite, gives you a solar rating, along with an estimate, and a breakdown of the costs, incentives, cash frow and break even point.
  • Find Solar. Another calculator that I liked, which is good if you want a really quick estimate.
  • RoofRay This one is pretty neat. It uses Google maps to draw the solar panels on your house. Unfortunately, our house doesn’t show up on the Google maps yet; but it was fun to play with!

Solar Power Quotes

We’re planning to obtain at least 3 quotes to compare the cost for the system. We’re also considering a site assessment, which is an independent third party consultant to help us analyze our needs and recommend a correct size and site plan.

Action Plan

We have more research to do before we jump right in. But, the initial break even point of 8 years from the solar estimator calculator was promising. And the additional financial incentives from the electric company and being able to sell excess energy will bring it down even further.

We need to find out the regulations of our homeowners association, and we need to have a site assessment done. In addition, our state requires that we submit an application before we begin if we want to use the 25% rebate program. We also have to apply with our electric company because we plan to connect to the utility grid to sell our excess electricity.

Tax day is here! Have you filed your tax return yet? If not, you can always file an extension. Don’t forget that the first 2009 estimated tax payment is also due today.

Lots of first time home buyers are planning to file for the 2009 $8,000 First Time Home Buyer Tax Credit on their 2008 tax returns. There are lots of questions about the tax credit, so let’s dive right in!


If we are purchasing a home as a married couple and one of us is a first time home buyer and the other one is not, do we qualify for the credit at all? – Will

According to IRS Form 5405, it looks like for married couples, both of you must be first time home buyers to claim the credit.


Is there a way I can qualify for the $8,000 credit if I am preapproved for a loan before December 1st, but I don’t purchase a home until summer 2010? – Steve

Unfortunately, you need to purchase your home before November 30, 2009. A preapproval by that date won’t qualify you for tax credit.


Is this credit “up to” $8,000, depending on your income? What I’ve heard is that unless your tax liabilities are greater than $8,000, you won’t be able to claim the full credit amount. – Max

The “up to” part accounts for the 10% of purchase price. If you only bought a $50,000 home, you would get $5,000. The tax credit is refundable, so you could receive more money than your tax liability.


We sold our home ten years ago, bought a mobile home, which we own, but not the land. We pay rent on the lot and pay only personal property taxes on the mobile home, just like our autos. Do we qualify for the $8,000 credit? – Harvey and many others

I’ve done a lot of research on the mobile home issue for you. Unfortunately, it looks like mobile homes are still considered a primary residence. Therefore, if you owned one in the last 3 years, you will not be able to claim the tax credit.

See “Who Can Claim the Credit” section of Form 5405. It states:

You (and your spouse if married) did not own any other main home during the 3-year period ending on the date of
purchase…. Main home. Your main home is the one you live in most of the time. It can be a house, houseboat, housetrailer, cooperative apartment, condominium, or other type of residence.

Think filing an extension is only if you haven’t finished your taxes? Think again! An extension is actually a powerful tool to lower your tax bill, or place a hedge against your taxable income next year.

Tax Extension

Taxes are due on April 15, but an extension will get you an extra six months to file. You still need to pay the taxes due on April 15, but your filing can wait. Once you’ve filed an extension, the filing is due October 15, 2009.

How to File an Extension

I used TaxCut to prepare my taxes, but the cost to e-file an extension was $19.95. No thanks. Luckily, there are plenty of other options to e-file an extension for free:

I used the free fillable forms. Just create an account and select “file an extension.” It took about 5 minutes. It was very easy to copy my information from TaxCut to the fillable forms. There was a spot to put in the automatic deduction from my checking account for our taxes due.

If you want to print and mail the form, you can use IRS Form 4868: Application for Automatic Extension of Time to File.

Lower Your Tax Bill

For the self employed out there, we know that solo 401k contributions reduce your taxable income. However, if you found yourself stuck with a big tax bill and wanted to put more money in your solo 401k, but don’t have access to the money yet, the extension will be a great help.

The great part about a tax filing extension is that it also extends the date that contributions are due for a solo 401k. This is different than the rules for IRAs. It also allows you a unique strategy to lower your tax bill with a very late contribution to your retirement plan.

Just think, you can put the following possible sources of income to use for your 2008 tax year, even if you receive them after April 15:

How to Hedge Your Tax Bill

In addition to being able to make a contribution later in the year, chances are by October 15, you’ll also have a better idea about how much income you’ll bring in for the year.

Our self employment income is extremely variable, so we never know where we’ll end up at the beginning of the year. However, by October, we have a pretty good idea. Many of you with small businesses fall into the same trap.

The great part about the tax extension, is that you can wait and see if your taxable income will be lower or higher next year, and make the contribution earmarked for the solo 401k in the year you need it most.

Even if you end up in the same tax bracket both years, you may find yourself able to reclaim more of the phase-outs of some common traps, like the student loan deduction or child tax credit.

Action Plan

I actually have a new set of vacation pay that I won’t get until September when my employer will settle up from when I left my job last year. I’ve earmarked it to put into my solo 401k to lower our taxes.

I want to wait and see which year, 2008 or 2009, that the deduction would benefit most. With the tax extension, I’ll have the option to apply it to either year.

The $15,000 home buyer tax credit that was scaled back in favor of an $8,000 First Time Home Buyer Tax Credit in the economic stimulus plan is showing signs of life again!

Last week, Republicans proposed the Responsible Homeowners Act, which revives the $15,000 home buyer tax credit.

$15000 Home Buyer Tax Credit

The proposal includes a $15,000 home buyer tax credit. Details of the tax credit include:

  • Purchases of all primary residences, not just first time home buyers.
  • Purchased before July 1, 2010.
  • 5% minimum down payment.

Tax Credit to Refinance

In addition to buyers, they propose a refinancing tax credit. It’s a $5,000 tax credit that could be used to cover closing costs, buy down points, or reduce principal. It would include refinances that take place by July 1, 2010.

Since many people are refinancing right now it will be interesting to see if they make it retroactive to include those of you who have already done it. Otherwise it might be another scenario where early birds are left out in the cold.

Tax Breaks for Investors

I was intrigued by the inclusion of tax breaks for investors, since we’re getting into real estate investing right now:

An equalizing of the treatment of a home purchased for occupancy with a home purchased for rental purposes (defined as being rented to the same tenant for at least 181 days out of the year). The same exclusion from taxes for any future appreciation in the home value applies. This covers purchases made before July 1, 2010.

The proposal also includes some incentives for lenders. Complete details on the proposal can be read at

Home Owner Tax Credits

We’ve seen so many forms of the home buyer tax credit. Right now we have the $7,500 First Time Home Buyer Tax Credit (which was really a loan) for 2008 and the $8,000 tax credit for 2009.

In addition, there’s the Making Home Affordable Program for refinances and modifications.

Is anyone else having a hard time keeping up with the constantly changing programs for home buyers and home owners? It seems like it will be really hard to measure the success of any of the programs since they keep changing and adding to them.

The Make Working Pay tax credit was included as part of the American Recovery and Reinvestment Act. Beginning in the next few weeks, you’ll begin to see the money in your paycheck.

Make Working Pay Tax Credit

The credit is $400 for working individuals and $800 for married filing joint. The refundable credit is available in 2009 and 2010. (In 2011, it will be replaced by the Payroll Tax Credit). The maximum credit is 6.2% of earned income; it phases out at $75,000 for individuals and $150,000 for married couples filing jointly.

If you don’t meet the making work pay tax credit eligibility, you may have to repay the tax credit.

How To Get Your Money

The withholding on your paycheck will be lowered resulting in more take home pay. You do not need to submit a new W-4 form, your employer will automatically adjust your withholding. Employers need to begin using the updated withholding tables no later than April 1, 2009.

If you are curious, you can calculate the new amount you’ll have withheld based on the new withholding tables. Use the table that corresponds to the filing status and number of exemptions your employer has on file from your last W-4.

If you don’t make enough to pay income tax or your employer does not withhold taxes, you can claim the credit on your 2009 tax return.

For Self Employed

Self employed workers can reduce your estimated tax payments if you want to keep the money in your pocket instead of waiting to claim your tax credit when you file your return.

You can see Publication 15-T for more information from the IRS on the Make Working Pay Tax Credit.

Action Plan

Because the $400 will be spread out over 9 months, it could get easily lost in your day-to-day finances. If you are paid every other week, you will probably see about $20 extra per paycheck.

Make a plan of how you want to spend your tax credit, without just absorbing the money into your monthly cash flow. To keep track, separate the extra money each time you get paid and allocate it to your goals. Once you receive your entire $400, you’ll have something to show for it instead of wondering where it went!

Happy first day of spring! The weather is getting nicer and it’s time to get outside. However, it’s also less than a month until taxes are due. Are yours done?

Great news for the procrastinators out there! The Free Money Friday feature is a TurboTax giveaway for two lucky readers. The prize is a TurboTax Premier Online access code.

How to Enter the TurboTax Giveaway

To enter the giveaway, just leave a comment below answering one of the following questions:

What financial task do you still need to complete before winter is over (besides your taxes)?


If you’ve already finished all your winter tasks, what financial task is your top priority for spring?

The TurboTax giveaway will end next Friday, March 27 at 5 pm central time and winners will be announced on Saturday, March 28.

Helpful Tax Information

If you’re still working on your taxes, here are some helpful articles:

The details for the Homeowner Affordability and Stability Plan were released yesterday. The new title of the program is “Making Home Affordable.”

There are two components for home owners, refinancing and loan modifications. Participation is voluntary and the lender has to choose to participate. Details of both plans are below.

Home Affordable Refinance

Borrowers who haven’t been able to refinance because their home value decreased now have an option to refinance into a 30 or 15 year, fixed rate loan.

Eligibility is as follows:

  • Your loan is is owned or controlled by Fannie Mae or Freddie Mac.
  • You are current on your mortgage payments.
  • You have stable income to support the new mortgage payments.
  • Your first mortgage will not exceed 105% of the current market value of the property.

Want to find out your FICO score before you refinance? Get your Free FICO Scores & Credit Reports.

Home Affordable Modifications

Requirements for the loan modification program are:

  • Your loan must have been obtained on or before January 1, 2009.
  • Have a first mortgage with a balance less than $729,750.
  • Be owner occupied in a one to four unit property.
  • Document income with signed IRS 4506-T, two most recent pay stubs, and most recent tax return.
  • Sign an affidavit of financial hardship.
  • Modify by December 31, 2012. Updated: Extended until December 31, 2013.
  • Have a mortgage payment that is no longer affordable, examples include significant change in income or expenses.
  • Go to counseling if household debt is more than 55% of income.

The loan modification will lower the interest rate to make the payment (principal, interest, taxes, insurance, and home owners association dues) 31% of income. After five years, the rate will adjust 1% each year until it reaches the prevailing market interest rate on the date the modification.

In addition, there may be an incentive payment for borrowers for on time payments. Over five years the total principal reduction is up to $5,000.

Making Home Affordable Program Plan

Complete details, and a tool to find out if you are eligible, are listed at Financial or