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A Project of The Annenberg Public Policy Center

“Clunkers” Credits Taxable?

Q: Will the "Cash for Clunkers" credits be taxed as income for consumers who participated in the program?

A: The act establishing the program prohibits the credit from being treated as income for federal income tax purposes. The credits, however, may be subject to a state or local income tax depending on the laws of the state or locality where the consumer resides.


Regarding the cash for clunkers program, is the $3,500-$4,500 trade-in value for clunkers going to be reported on 1099 forms as income for the purchaser of a new car?


The federal government officially shut down its Consumer Assistance to Recycle and Save (CARS) program, also known as "Cash for Clunkers," in late August. But there are still questions about how consumers who participated in the program may be affected when it’s time to file their taxes.

We’ve received queries from readers wanting to know if the credits (or vouchers) of up to $4,500, which were used as incentives to get consumers to trade in their "clunkers" for more fuel efficient cars, can be taxed as income. The answer to that question, at least at the federal level, is no. The CARS program Web site explains it this way on its frequently asked questions page:

Cars.gov: Is the credit subject to being taxed as income to the consumers that participate in the program?

NO. The CARS Act expressly provides that the credit is not income for the consumer.

And language in the Consumer Assistance to Recycle and Save Act of 2009 says that "[a] voucher issued under the program or any payment made for such a voucher pursuant to subsection (a)(3) shall not be considered as gross income of the purchaser of a vehicle for purposes of the Internal Revenue Code of 1986."

Things may be different at the state and local level, though. For example, the Arizona Department of Revenue says that residents will "not be subject to Arizona income tax on the value of the voucher." But the California Franchise Tax Board says that in "some cases" its residents "may be" subject to a state income tax:

California Franchise Tax Board: California law does not conform to H.R. 2346 [CARS Act]. For state income tax purposes trade-ins are treated as normal sales or exchanges, and in some cases the value of the voucher received may be subject to state tax. That is to say, the person subtracts his or her basis (generally the cost of the used vehicle) of the car traded-in from the amount realized (the applicable voucher amount, plus any other salvage value the dealer offers as part of the exchange) to determine whether a gain or loss was realized on the disposition of the used vehicle. For example, if the family car was originally purchased for $19,500 and traded in for a $4,500 discount under the “Cash for Clunkers” program, there is no taxable gain. The $15,000 difference is a personal loss under tax law and may not be deducted for tax purposes. However, if the family car was purchased for $3,000 and it was traded in for a $3,500 discount, the $500 difference needs to be reported as income for state tax purposes.

In addition, different states are treating the issue of sales taxes in different ways. California, as an example, said that it would deduct the value of the credit from the sales price before it calculated the sales tax, thus lowering the amount of tax paid. Virginia, on the other hand, said that it would not.

To find out whether "clunkers" credits are taxable income in your state, or how sales taxes on a new car should be calculated, we suggest consulting your state’s tax laws or calling your state or local tax office.

-D’Angelo Gore


"Helpful Q&As for Consumers." Cars.gov. Accessed 3 Sep 2009.

"Consumer Assistance to Recycle and Save Act of 2009." Pub. L. 111-32, 24 Jun 2009.

California Franchise Tax Board. "Clarification of the “Cash for Clunkers” Tax Rules." Sep 2009.

Arizona Department of Revenue. "Federal C.A.R.S. Program – “Cash for Clunkers:" Taxation of $3,500 or $4,500 credit voucher." Jul 2009.

California State Board of Equalization. "Tax Exemption for Car Allowance Rebate System Issued by Federal Government." Jul 2009.

Virginia Department of Motor Vehicles. "Cash for Clunkers’ Frequently Asked Questions." Accessed 3 Sep 2009.