Ask Sid: Who Owes the Clunkers Tax?

Q. Do I need to pay taxes on the Cash for Clunkers incentive I received?

A. Not to the IRS. Under last summer’s popular Car Allowance Rebate System (CARS), better known as Cash for Clunkers, the government-issued credit for eligible trade-ins is not considered income to consumers, and is not taxed as such.

But some states include Clunkers credits in the price of the vehicle, and depending on where you live, you may need to pay state or local sales tax on that $3,500 or $4,500 credit. Your best bet is to consult with an accountant or tax adviser, but a few states where the incentive is likely to be taxable are Arizona, Idaho, Nebraska, New Jersey, New York, Ohio, Virginia and Washington.

For more information on tax rules related to Clunkers incentives, check your state’s tax office.

Sid Kirchheimer writes about money and consumer issues.