I made the mistake yesterday of sharing a link with Twitter followers indicating the Cash for Clunker rebate would be treated as taxable income. Astute followers quickly pointed out that the link I shared was from a site spreading a false rumor about the Cash for Clunkers tax implications for buyers.

Instead, I should have checked out the C.A.R.S. government-run site, which provides the following answer to the burning cash for clunker tax rules question:

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.

While I wasn’t fond of the Cash for Clunkers program from the get-go, I concede that it spurred on many more sales than I expected. In fact, it might be the first program with any real stimulative effect since the passage of over a trillion dollars in bailouts and stimulus packages.

It seems Americans are always up for a $4,500 rebate. However, the suspicious consumer in me wondered if the manufacturers suggested retail price (and dealer price) didn’t go up in advance of the deal. After all, an increase in consumer buying power, especially when generated artificially as in the case of a government rebate, is often followed by higher prices.

I also wondered if consumers would be trading in cars for a rebate when they could have received much more money via a private sale. But that is always a risk when trading in a car at a dealership. The dealer is not going to give you top dollar because he has to leave a little room to make that when he resells the car (not a problem under Cash for Clunkers since they were ordered to be destroyed) he turns a small profit, or at a minimum breaks even.

Debt is also a concern. How many people trade in a paid-for clunker for a shiny new car with a big auto loan? It might be better for the environment, but is it better for your family finances? That remains to be seen. Might be a good time to be in the repo business, though.

All this is water under the bridge now, as the Cash for Clunker program ended Monday night. However, it sure would have been quite the surprise to learn Cash for Clunker tax rules meant the rebate you received was treated as taxable income. From my web research, it sounds like there still may be an issue for dealers, and even buyers may not be completely out of the woods when it comes to state taxes on Cash for Clunkers. At least it appears Cash for Clunkers will not negatively impact buyer’s federal taxes.

Additional Resources:

• Cash For Clunker Payments – Tax Rules
• Cash for Clunkers Tax Rules – The Truth
• (More) Cash for Clunkers Tax Rules
• Does Cash for Clunkers Affect Your Taxes?
• Tax Rules And Consequences Of The Cash For Clunkers Program

The following guest post is from one of my favorite writers, Neal Frankle of Wealth Pilgrim. After reading the post, head over to Neal’s site and check out his free subscription options.

Let the Government go bail out somebody else.  It’s too expensive for you.

I’ll admit that I haven’t followed all the ins and outs of this program but I have two good reasons for not doing so:

1. I have a 1995 Camry that I love.  My two eldest daughters used it to get to and from high-school. I still have a ten-year old at home and my ultimate goal is for her to use it to get to high-school 6 years from now.
2. As long as I have a pulse, I will do everything I can to stop anyone I know from buying a new car.  It’s a complete waste of money in most cases.

So why am I bothering to write about this? Well, the subject came up over the weekend.  My daughter is thinking about getting a new car and “taking advantage” of the “Cash for Clunkers” program (with my beloved Camry no less!).  I’m dead set against it.

This program stinks worse than the junk you find when you clean out your trunk for one major reason:

It forces you to get rid of a very inexpensive mode of transportation and burdens you with a very expensive form of transportation.

An automobile is a device we use to move around.  That’s it.  It’s not a social statement or a tool to increase your self-esteem.  It’s a hunk of metal that moves you.

That being said, the question is, how do you get from point A to point B in the safest manner with the least cost. Right?  Am I missing something?

Let’s look at my Camry to illustrate the “virtues” of this program.  You tell me where I’m wrong.

Let’s take the first scenario where you trade in your clunker, receive $4500 and buy a new car.  What does it cost you to own that new car over the next 7 years?

A 2009 Camry (SE) costs a hair over $23,000 if you buy a new one.  Assume you buy it after turning in an old clunker, drive it for 7 years and sell it.  In this case, here’s how your numbers add up:

So, if you buy the new car, it will cost you about $1700 per year to own.  This is without the high cost of insurance you must buy when you own a new car.  It also excludes the jacked up price you paid for the new car because everyone wants one right now and it excludes the maintenance cost.  (I could not find good data on what it costs to maintain a used car.)

Now, lets assume you pass on the cash and drive your clunker.  Here’s what it costs you to own it per year:

This means you could spend up to $1400 per year on repairs and still save money vs owning a new car.  This assumes the car is safe and reliable for your particular needs.  In my case, my 1995 gem is perfect.

By the way, this analysis ignores the low cost for insurance for the used car.  No question about it, the clunker is better than the cash.

Will the clunker last another 7 years? Maybe not.  So let’s consider another alternative.

If and when my good old 1995 Camry dies, I’ll replace it with a 2 or 3 year old car.  It’s still going to be much cheaper than using this program.  Take a look:

I used the Toyota site to determine the new car prices.  I used the Kelly Blue Book site to get residual values. Again, this excludes the higher cost for insuring the new car but the lower maintenance expense. Buying used saves you $600 every year.

The bottom line is even with the clunker cash, it doesn’t make sense to buy a new car.  So just remember this, friends don’t let friends buy new cars.

Additional Reading:

• Cash for Clunkers Taxable?
• Cash for Clunkers Tax Rules

Videos are now beginning to surface showing the destruction of perfectly good automobiles thanks to the cash for clunkers program. I fail to see the stimulative effects of disabling the engine of a car with thousands of useful miles in it for it to be scrapped and piled in an already overcrowded junkyard or landfill.

It is is especially troubling considering the number of people out there struggling to hold a job, or find work because of a lack of transportation. In fact, there are probably hundreds of uses for these cars. Why not donate them to shelters, churches, and high school shop classes or trade schools to train new mechanics? What’s next; the leveling of perfectly good homes if people agree to buy a new, slightly smaller one and accept $10k in taxpayer money to do it?

As for me, I’m keeping my 19 year-old clunker.

Check out the government-mandated destruction of a perfectly good Volvo, and then read on for the weekly roundup.

Video – Volvo Cash for Clunkers Engine Disabling

The Frugal Roundup

Debt Reduction – Emergency Fund Savings – The Balanced 75/25 Method. I’ve struggled finding a balance between debt repayment and building our emergency fund. The 75/25 method makes a lot of sense. (@Debt Free Adventure)

What Yoda Taught Me About Money Mastery. Points to Neal for working Star Wars into a personal finance post. I enjoyed the points made in the post. It is true that without teaching there is no learn (hey, I made a Yoda-ism!).(@Wealth Pilgrim)

Stuff Isn’t Always the Enemy. A nice perspective on the accumulation of stuff. Nothing wrong with a healthy collection. It’s when it becomes an unhealthy hoarding habit that it becomes a problem. (@On Simplicity)

What To Do With Your Money Just In Case Trends Forecaster Gerald Celente Is Right. I don’t subscribe to most doomsday theories, and this is no exception. However, I do think it is prudent to make basic preparations for unforeseen emergencies, natural or otherwise. (@Get Money Energy)

Are You Planning Your Life Around Money? The exercise described here as “begin with the ending in mind” works wonders for helping one form the proper financial priorities. (@Money Smart Life)

I Am Getting Fired: Looking At the Bright Side of a Bad Situation. While I was sorry to hear about Jeff’s situation, I was inspired by his response. He’s right, sometimes getting fired is just the “kick in the pants” we need. (@My Super-Charged Life)

32 Thought-Provoking Life Stories.  I read through each one of these stories, and each of them really “made me think.” (@Marc and Angel Hack Life)

Best of the Rest

• Personal Loan Interest Rates from Lending Club
• My How We Have Changed
  
• Don’t Waste Money Financing a Car for More Than 3-5 Years
• Cash for Clunkers: What’s Your Take?
• The Shame and the Glory
• Cash for Clunkers
• House and Rent Update
• Pros and Cons of Taking Over a Car Lease

The House recently passed a Cash for Clunkers bill which aims to increase new car sales while getting older, inefficient ”clunkers” off the road. In exchange, participants can earn up to a $4,500 credit/voucher off the price of a new, more fuel-efficient car. Here’s why I don’t think it will work, and why I don’t plan to participate if it should become law.

Photo courtesy of dave 7

First of all, I think it is a mistake to create artificial demand for new cars by borrowing from taxpayers. I would much rather see the four billion dollars this program will likely cost be used to pay down some of our national debt, and let the creation of buyer’s incentives be left up to car manufacturers.

With unemployment still hovering around double digits (real unemployment is actually much higher), I doubt many people are going to rush out to buy a new car simply because the government is offering cash for clunkers. Environmental concerns aside, we’d be better off financially, continuing to drive our clunkers.

What if your so-called “clunker” is worth more than the value of the voucher? You might be able to get more from a straight-up trade in, or selling your vehicle private sale, than taking advantage of the cash for clunker offer. Of course, that option does not get the cars off the road, which is a close second objective of this bill–the first is to stimulate new car sales.

If you are on the fence about the cash for clunker program, perhaps the ever-increasing gas prices this summer will help change your mind. Do you think it is a coincidence prices are quickly approaching $3.00 per gallon?

This all reminds me of the $600 tax rebate checks, which had little effect (temporary, at best) on stimulating spending. When people are worried about losing their jobs, and already deep in debt, they are usually not in a spending mood. Any additional cash will be saved or used to pay down debt. I plan on keeping my clunkers, thank you very much.

Read more about the Cash for Clunkers program:

• Clunkers for Cash: Is It Even Worth It?
• 2009 Cash for Clunkers Program: Trade In Your Old Junker for Money
• Cash for Clunkers Taxable?