Uncle Sam Really Wants You to Buy a New Car

Part of Uncle Sam’s plan to stimulate the economy is to increase car sales.  The goal here is two-fold: to save and increase jobs and to put more fuel-efficient vehicles on the road.  This would reduce our dependence on foreign energy and lessen harmful emissions nationwide.  To accomplish these ends, Congress has added a number of incentives to those already available from manufacturers faced with reduced sales brought on by the slow economy.

Cash for Clunkers – As an incentive to have older gas-hogging vehicles scrapped instead of being sold after trade-in, the government will give a nontaxable cash allowance of $3,500 or $4,500 in lieu of the normal trade-in allowance for individuals and businesses.  To qualify for this program, the new vehicle must be purchased (or acquired on a five-year lease) between July 1 and November 1 of 2009 from a participating dealer.

CAUTION: At press time, the government’s initial $1 billion allocation of funds for this program has almost been used up and Congress was moving to add another $2 billion in funding. Watch for further developments.

The trade-in car (clunker) must be drivable, get no more than 18 miles per gallon, have been built in 1984 or after, and have been owned (registered to) and insured by the purchaser for at least a year prior to the trade-in.

A consumer will receive a $3,500 voucher towards the purchase of a new car with a manufacturer’s suggested retail price (MSRP) of $45,000 or less and getting at least 22 mpg.  The voucher will increase to $4,500 if the new car is 10 mpg higher than the trade-in.

The terms “cash allowance" and “voucher” may be a bit misleading: In actuality, the dealer will receive an electronic payment from the government equal to the $3,500 or $4,500 subsidy, which is credited as all or part of the down payment on the vehicle’s purchase. The consumer does not receive either greenbacks or a paper voucher.

For personal-use vehicles, there are no tax implications.  Since the voucher is not treated as income, a business that utilizes the voucher program is treated as if it traded in the old vehicle and received zero for it.  Its basis in the new vehicle would be the amount paid net of the voucher and any other rebates. 

Special Sales Tax Deduction – For 2009 only, taxpayers can deduct the sales or excise taxes on up to the first $49,500 for the purchase of a new vehicle, including motorcycles and light trucks, purchased after February 16 and before January 1, 2010 whether their deductions are itemized or not.  The deduction is not limited to one vehicle, and the $49,500 limit is per vehicle.  This special deduction is phased out for higher-income taxpayers with a gross income between $125,000 and $135,000 for individual filers (between $250,000 and $260,000 for joint filers).

The tax benefit of this deduction depends upon your individual tax bracket.  Let’s say that you are in the 25% tax bracket, purchased a $35,000 vehicle, and the sales tax was 8%.  You would save $700 in taxes ($35,000 x .08 x .25).  Keep in mind that this deduction can only reduce your tax liability to zero, so you may not receive the full benefit if you already pay a minimal amount of tax.

Hybrid & Lean Burn Credits – Although credits are no longer available for Toyota, Lexus or Honda hybrid vehicles, they are still available for the purchase of Ford, GM, Nissan, Mazda and Chrysler qualifying hybrid vehicles. (The credit on qualifying Ford models is being phased out, and no credit will be allowed for Ford hybrids purchased after the end of the first quarter of 2010.) The credit amounts vary by vehicle model based upon their efficiency with some currently available models providing a credit up to $3,000.  In addition to the hybrid credit, there is a lean burn credit available for the purchase of certain diesel-powered Volkswagens and Mercedes Benz vehicles with some models providing a credit as high as $1,800. 

For personal-use vehicles, these credits are nonrefundable personal credits, which mean that your 2009 tax can only be reduced to zero, any excess is lost, and you may not receive full benefit of the credit.  For the vehicle’s business-use portion of the credit, the credit is a general business credit and the unused portion can be carried back two years and forward twenty.  Both credits are deductible against the alternative minimum tax beginning in 2009.

Plug-In Electric Vehicle Credits – Congress recently created a $2,500 credit to stimulate the manufacture of plug-in-electric vehicles.  Currently, the chances of finding a four-wheeled highway vehicle that qualifies for this credit is slim.  There is also a low-speed, motorcycle and three-wheeled vehicle credit available.  Please call this office if you anticipate qualifying for either of the credits and wish more information.

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