I’ve written quite a bit about the cash for clunkers program here on Bible Money Matters in relation to how the program worked, who qualified for the rebate, and how you could go about redeeming your voucher.

The program has now run its course, and now that the excitement has died down people are beginning to wonder if there are any other consequences to the program, specifically when it comes to their taxes.

Cash For Clunkers And Federal Taxes

Many people were concerned that when it came to their federal taxes they might have to treat the $3500-$4500 voucher as taxable income.  When you go to the government’s website, however, they are quick to dispel that notion.  From the cars.gov FAQ:

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.

Since the credit is not treated as taxable income, you won’t have to pay taxes on the voucher for your federal income taxes.

The question still remains, however, will you have to pay state taxes on the voucher/credit?

Cash For Clunkers And State Taxes

The question of whether you’ll have to pay taxes on the credit for state taxes is a bit more murky. From the cars.gov FAQ:

Do I have to pay State or local sales tax on the amount of the CARS program credit? MAYBE. The question of whether a consumer must pay State or local sales tax on the amount of the CARS program credit depends on the sales tax law of each State or locality. Consumers should review the law of their respective States or consult a tax advisor to answer this question.

So the answer is that  yes, you might have to pay taxes on the credit if your state and local authorities say you have to.   I don’t want to post an entire list here of which states do and don’t count the credit as taxable income, but one of my blogging colleagues put together a pretty good list. You can find it here:

Cash For Clunkers Tax Rules

Other Cash For Clunkers Reading:

• Cars.gov – Government’s Official Website
• More Cash for Clunkers Tax Rules
• Cash for Clunkers Taxes for State
• Cash for Clunkers Tax
• Does Cash for Clunkers Affect Your Taxes?

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Tax Rules And Consequences Of The Cash For Clunkers Program

Clunkers For Cash Active As Of July 1st

The Cash For Clunkers program has been active as of July 1st, and if you have an eligible car, you can now take advantage of the program.  As a quick refresher, what vehicles are eligible for $3500-4500 voucher?

• Must be in drivable condition.   (That means you can’t tow in that truck on blocks sitting in your front yard)
• Has to have been continuously insured to the same owner for at least one year immediately prior to trade-in. (That means you can’t just go out and buy a cheapo old truck to trade in)
• Manufactured in model year 1984 or later, so 25 year old or newer cars.
• Have a combined fuel economy of 18 mpg or less.  Get anything more than that, and you’re out of luck!

You get either a $3,500 or a $4,500 voucher towards your new car, depending upon the increase in mpg  in old car to new car.  To find out the MPG of your old car vs. a new car, check out this website.

For a video presentation talking about the program, take a look at this video:

Video Detailing The CARS Program From KBB

UPDATE: Some Cars Are No Longer Eligible

If you checked previously to find out if your car is eligible – you’ll want to double check to make sure.  The EPA has revised fuel-efficiency ratings in preparation for the CARS program, and upwards of 100 vehicles had their mileage figures changed.  This means that some vehicles are no longer eligible (while others have now become eligible).

As it prepared for its “cash-for-clunkers” program, the government rejiggered gas mileage figures on about 100 older vehicles last week in a way that changed whether they would be eligible for up to $4,500 in sales inducements.

The Environmental Protection Agency says the changes resulted from a double-check of its fuel-efficiency ratings on more than 30,000 1984 and newer vehicles in advance of the official start of the clunkers program Monday.

About half  of the 100 suddenly did not qualify because their combined mileage rating was revised upward; others unexpectedly got in.

The result of this change?  Some people that had car deals ready to be completed are no longer eligible and are out of luck.  They’re obviously not happy about it.  Be sure to make sure your car is STILL eligible.  *(hat tip to commenter Chris)

Cars Consumer Bill Of Rights

The government website lists a bunch of consumer rights related to the CARS program. I thought I would reprint them here for your reference:

Qualified consumers may participate in the CARS Program between July 1, 2009 and November 30, 2009 on authorized funds are no longer available.

Qualified consumers will receive a credit of $3,500 or $4,500 for an eligible trade-in toward the purchase of lease of an approved vehicle under CARS Program.

Qualified consumers will receive the $3,500 or $4,500 credit at the time they purchase their new vehicle.

Dealers must provide consumers with any other advertised rebates or discounts in addition to the credit they receive through the CARS Program.

Consumers should expect to conduct their deals at their dealership of choice, not on the Internet.

Consumers should expect the dealers to provide their best estimate of the scrap value for their eligible trade-in vehicle. Dealers are allowed to deduct $50 from this value for their administrative costs.

Consumers should expect that all information collected through the CARS Program will be kept confidential. Social Security numbers are not required for a CARS transaction.

Questions That Need Clarification

I’ve posted about the Cash For Clunkers program twice before.

• Cash For Clunkers
• Cash For Clunkers FAQ

In those posts the commenters brought up a lot of good questions about the program.  Here are a few of the more popular ones:

1. Can I trade in one vehicle type for another vehicle type? Yes.  As long as you’re trading it in for an eligible vehicle type, you could trade in a van and buy a car.  Motorcycles are not eligible.
2. Can the person who owns the “clunker”  buy a car for someone else in the family? According to the CARS helpline (866-CAR-7891 (866-227-7891)), you can do this.
3. I have a lease and it is due to expire soon. Does the program apply to leased cars that qualify as “clunkers”? No, leased cars do not qualify as you don’t own the vehicle and can’t turn it in to be destroyed.
4. My car qualifies, but it has a salvage title. Can I still participate in the program? The language of the bill doesn’t exclude salvage titled cars, so as long as the car meets the other qualifications, you should be fine.
5. When does the program actually start? Vehicle purchases are eligible for the CARS program starting July 1st.

As always, please confirm any questions you might have about your car’s eligibility by calling the CARS helpline  at 866-CAR-7891 (866-227-7891)

Alternatives To Cash For Clunkers

There are alternatives to cash for clunkers for those that don’t qualify for the program.   Some are obvious – others not as much.

• Sell your car in a private party sale:  While it may be more hassle, you may end up getting more for your vehicle than if you traded it in for the CARS program.  Even if you don’t, you’ll still probably make something that you can use towards the purchase of a nice used car!
• Donate your clunker: While the government has made doing this not as attractive with recent changes to tax law, you can still claim a deduction on your taxes for the actual sale price of your clunker.  See the donation tax laws here.
• Trade it in:  You can still trade your vehicle in at the dealership if you don’t want to bother with a private party sale.  You may not get as much for it, but you’ll still get something for it -and you can use it towards the purchase of a used car, instead of a new car!
• Keep it: Many people aren’t even considering this option – but why not?  If the car is still running well, you may as well just keep it, and drive it till it dies!  You’ll save a ton of money!

Have you taken advantage of the Cash For Clunkers program?  Was the process handled well at the dealership?  Did you decline to do the deal because you were better off selling or trading your car in? Tell us about your experience in the comments!

UPDATE: The program has been suspended after less than 1 week. Find the details here.

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Cash For Clunkers Voucher Program Is Now Available. Things To Keep In Mind When Trading In Your Gas Guzzler.

A couple of weeks ago I wrote about the Cash For Clunkers program that was expected to be passed. Now, a couple of weeks later the program has passed and is signed into law, and people will soon be able to take advantage of it.

I’ve been getting emails and comments surrounding the program, asking for more details. I decided to put together a quick FAQ covering some of the most common questions surrounding the program.

FAQ About Cash For Clunkers

Q: Is the billed signed into law yet?

A: Yes the Cash For Clunkers bill has been signed into law.  The program is now the responsibility of the NHTSA and they will be implementing the system with car dealers. The program’s official website is: http://cars.gov. Dealers will be responsible for signing up for the program, and participating dealers will eventually be listed on the government website.

Q: When will the program be available?

A: Your new car must be bought or leased between July 1st and November 1st to qualify.

Q: Can the car you purchase with the trade in voucher be a used vehicle?

A: The purchased vehicles must be new (2008, 2009, 2010 models) and cost no more than $45,000.   You cannot trade in a clunker for a motorcycle. If you’re looking for a used car, check out this site.

Q: Can I lease a car through the program,  or do I have to purchase the new car?

A: Yes you can lease, however, the Cash For Clunkers Act requires that any lease under the program be for a period of at least five years.

Q: How do I find the combined EPA mileage estimates on my old clunker to make sure it qualifies for the program?

A: Go to http://www.fueleconomy.gov and click on the model year of your vehicle, the make, and then the model. Under the words “ESTIMATED NEW EPA MPG” in the red banner, there is a red number with the word “COMBINED” under it. That is the new combined city/highway fuel economy for your vehicle. You may then enter the make, model, and model year of a new vehicle you may want to buy and see its combined MPG for comparison.

Q: Are there restrictions on the year of my trade-in?

A: The car can not be more than 25 years old, and it must meet the MPG requirements.

Q: Will all dealers be participating in the Car Allowance Rebate System (CARS)?

A: Most new cars dealers in the US will participate. They will have to register with the CARS program, but registration details have not been released yet by the NHTSA.  Registered dealers will be eventually listed on cars.gov, but it’s a good guess that most new car dealers will want to be a part of it.

Q: What do I need to bring when I decide I want to do the Cash For Clunkers trade?

A:  You should bring documentation showing the current owner of the vehicle, preferably the title, and documents showing that the vehicle has been “continuously insured by the same owner for a period of no less than 1 year prior to the trade-in.”   The final rule will specify what types of documentation would be acceptable  to prove ownership and the fact that the vehicle has been insured for the past year.

Q: Will I have to pay taxes on the voucher?

A: No.  The Cash For Clunkers Act expressly provides that the credit is not income for the consumer, so the consumer will not have to pay taxes on the credit.  The credit will be considered as income for the dealer.

Q: Are higher income folks excluded from the program?  Is there an income limit that leaves out some vehicle owners?

A: No.  Anyone can take part in Cash For Clunkers since it is designed to help new car dealers, and to help the environment.

Q: I bought a new car in February 2009.  Can the voucher apply to my past purchase – will it be retroactive?

A: No. Cars bought before the official start date (see above) won’t qualify for the credit retroactively.

Q: If my car is worth more than $4,500, should I take advantage of  the Cash for Clunkers credit?

A: The Cash For Clunkers Program would not give you any benefit if you are able to trade in or sell your car or truck for more than the $4,500 credit.   You’re probably better off not applying for the voucher.

Q: Is the CARS credit in addition to any  incentives that dealers are offering toward a new car purchase, or would this credit supplant those credits?

A: The CARS credit is separate from any manufacturer buyer incentives. For example, if your new car dealer is offering $3,000 off the list price of a car and you qualified for a $4,500 CARS credit from your trade-in, then the total reduction off the MSRP would be $7,500. You should always shop for the best deals before buying a car.

Q: Can I trade in more than one vehicle under the program?  Could I trade in two old cars and get a $9,000 credit?

A: The current wording of the bill indicates that only one CARS credit can be applied to a new car purchase.

Q: How do I know the amount of my credit?  Will I qualify for a $3,500 or a $4,500 CARS credit?

A:  The credit you get is determined by your current trade-in car’s current combined MPG, the new car’s combined MPG, and then the improvement you will get in MPG through getting the new car.  Here’s a graphic showing how to determine what your credit will be.

Q: Can I go to the junkyard and buy an old car and use it for a trade or trade in my parents old car?

A:  Probably not.   The NHTSA says you need to bring to the dealer documentation establishing the identity of the person who currently owns the vehicle (the title of the vehicle), and documentary proof that the vehicle “has been continuously insured consistent with the applicable State law and registered to the same owner for a period of not less than 1 year immediately prior to the trade-in.” There is some debate as to whether this means someone – like your parents could trade-in their continuously insured clunker for you, and then you can use the voucher. I wouldn’t count on it though.  Stay tuned for clarification on this question.

Q: What happens to my trade-in?

A: The car will be sent to the salvage yard. Some parts may be kept but the engine and drive-train will be crushed.

Conclusion

Those are a few of the more popular questions about the program that I’ve heard, and I hope that this helps to answer them.  If you have more questions about whether you are eligible or not, please check out our previous post on the Cash for Clunkers program.   Going through with it, and buying a new car?  Don’t forget to claim the new car sales tax deduction!  For more details check out my post looking at  common questions about the new car sales tax deduction.

Have other questions about the program that you’d like answered?  Need clarification on one of the points above?  Let us know in the comments and we’ll do our best to find an answer (or one of your fellow commenters can answer!).

UPDATE: The program has been suspended after less than 1 week. Find the details here.

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Common Questions About The Cash For Clunkers Program Answered: Gas Guzzler Rebate FAQ

Rebates, Tax Credits And Stimulating The Economy

The Obama administration has been giving us all sorts of stimulus packages this year that aim to stimulate spending in troubled sectors of our economy, and jumpstart consumer spending.  First we had the tax incentives for new car purchases, and then the $8000 tax credit for first time homebuyers.  Then we heard rumblings about the $8000 tax credit being expanded to $15,000 (which hasn’t happened yet).

Now the government is about to pass another measure that once again aims to help the struggling auto industry, and at the same time get some less efficient cars off of  the road.   The program is being called “Cash For Clunkers“, or ” Car Allowance Rebate System/CARS“.   The program will cost about $4 billion, and the money is currently proposed to come from Energy Department funding included in the already enacted $787 billion economic stimulus package.  The bill is now simply awaiting the president’s signature to be enacted.

Cash For Clunkers – Car Allowance Rebate System/CARS And How It Works

The aim of the program is to get older less fuel efficient vehicles off of the road.  You trade in your old car or truck  for a voucher towards the purchase (or lease) of a new vehicle that gets better mileage. The better the mileage of the new car, the more money you’ll get towards the  purchase of a new vehicle.

• You get either a $3,500 or a $4,500 voucher, depending upon the increase in mileage per gallon in old car to new car.  To find out the MPG of your old car vs. a new car, check out this website.
• The minimum combined fuel economy of a new car purchased under the program must be at least 22 mpg.
• Small trucks and SUVs have to get at least 18 mpg.
• Large trucks have to get 15 mpg.
• The old cars will be salvaged once they’re turned in.

Here’s a graphic showing the increase in mileage you would need to attain in order to qualify for either the $3500 voucher, or the $4500 voucher. The amounts vary depending upon the vehicle type.

So what cars are qualified to be turned in for the program?

• Must be in drivable condition.   (That means you can’t tow in that truck on blocks sitting in your front yard)
• Have been continuously insured to the same owner for at least one year immediately prior to trade-in. (That means you can’t just go out and buy a cheapo old truck to trade in)
• Manufactured in model year 1984 or later, so 25 year old or newer cars.
• Have a combined fuel economy of 18 mpg or less.  Get anything more than that, and you’re out of luck!

How Do I Participate In the Program?

To participate in the program you just have to buy a new car from a participating new car dealership.  The incentive amount that you qualify for will be applied to the new vehicle’s purchase price.  You won’t receive an actual check or voucher.  The program will run from July 1, 2009 to November 1, 2009.

In order to participate in the program car dealers will have to register with the National Highway Traffic Safety Administration (NHTSA), and it may take a few weeks for a list of participating dealers to be put together, so be patient!  The government will be putting out a new website to give details about the program, and which dealers are qualified to give you the rebate.

When Does It Start?

The Cash For Clunkers Program is slated to take effect as of  July 1, 2009, however, it still needs to be signed into law by President Obama.    When it finally is signed into law the NHTSA will need to work out details of the program and set up a procedure for dealerships to get registered with the program.    When all is said and done it may be a few weeks or more before buyers will be able to participate.

My Thoughts On The Program

To be honest I can’t see how this program will be very effective at any of it’s aims.  I really don’t think there are that many old cars with bad gas mileage on the road anymore.  According to one analysis by Arlington, Va.-based investment bank FBR Capital Markets, the parameters of the “Cash for Clunkers” bill are narrow, and the bill limits eligibility to fewer than 5 percent of U.S. vehicles.   The participation rate in the program is probably going to be much lower than that.  Even for those 5% of the cars that are still on the road, a good number of them may still be worth more than the voucher would pay for them.  So what’s the point in getting the voucher?   On top of that for many people just keeping their old clunkers makes more financial sense because it means they won’t have  payment on a new car, even if they are paying slightly more for gas.

With unemployment hovering around double digits, most people just can’t afford to be buying new cars right now. (In fact, many people are now saying that most of the “clunkers” that are still on the road, are actually owned by people in lower income brackets, and they really can’t afford a new car  anyway)

I’d much rather see the money spent on this program be used for things like paying down the national debt.    What do you think of the program?  Do you think it will be effective in it’s aims of taking less efficient cars off of the road?  Will it give a boost to new car sales? Is the program set to be a failure right out of the gate?

UPDATE: The program has been suspended after less than 1 week. Find the details here.

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Cash For Clunkers Rebate Program Might Save You Money On Your Next New Car Purchase. But Is It A Good Idea?

photo credit: kozumel

A few weeks ago the American Recovery and Reinvestment Act of 2009 was passed.  Since it was passed we have talked about quite a few of the benefits including home buyer tax credits, sales tax credits for new car buyers, and a post about overall stimulus package benefits. Today I thought we could answer the question that I keep seeing in the search and traffic logs for this site.  “When can I expect to see the increase in my paycheck for the “Making Work Pay” tax credit?”.

When Will I See An Increase In My Paycheck Due To The American Recovery and Reinvestment Act?

As a refresher, most people who work will be receiving a tax credit by having less federal tax withheld from their paychecks:

Making Work Pay Credit:  The stimulus bill will give a $400 credit per worker and a $800 credit per working couple.  Almost everyone will receive this.   The full credit would be paid to people making $75,000 or less ($150,000 per dual-earner couple).   A partial credit would be paid to those making above those amounts but no more than $100,000 ($200,000 for couples).  The credit would also be refundable, which means that even very low-income families who don’t make enough to owe income tax would be able to claim it. For most working individuals, the credit will be paid over time at roughly $15 per period, assuming 26 pay periods in a year. People who are self-employed can adjust their quarterly tax filings to account for the credit.

So pretty much everyone under 75-100k will be getting this tax credit through decreased withholdings.  So the question remains, when will this decreased withholding of taxes begin?  The IRS has put together new withholding tables for businesses to use when doing their payroll, and they have been mailed out to all businesses.   Businesses should all start using the new tables “this spring”.  From the IRS site:

“For most taxpayers, the additional credit will automatically start showing up in their paychecks this spring,” said IRS Commissioner Doug Shulman. “Since employers and payroll companies will handle this change, people typically won’t need to take any additional action. The IRS will continue working to implement this and other provisions of the new law as quickly as possible.”

The new withholding tables, along with other instructions related to the new tax law, will be incorporated in new Publication 15-T. This publication will be posted to this Web site next week and mailed to more than 9 million employers in mid-March. The IRS asks that employers start using these new tables as soon as possible but not later than April 1. Most workers will see a boost in their take-home pay soon thereafter.

So employers are being asked to start using the tables ASAP, but that they should start using them no later than April 1st. If you haven’t seen a boost in your take home pay by then, you should soon thereafter.  If not, you may want to check into it!

‘Making Work Pay’ Credit Could Bring Unexpected Tax Bill For Some

One thing to keep in mind when getting your tax credit is to make sure that you’re not getting too much.  From Fox News:

If you file a joint return with your spouse, and you both work, you should carefully review your withholding, because it’s highly likely both employers, without knowledge of what the other is doing, will adjust withholding such that both spouses receive up to $800, for a total credit of $1,600.

“It’s conceivable that if both are married-filing-joint and their income is not otherwise going to cause a phase-out [of the credit], they could get the double benefit,” said Frank Keith, chief of communications for the IRS. “When they file their return, the actual credit they’re entitled to is $800.”

That means paying back up to $800 with your return, though Keith said the money paid out this year, and thus any tax bill later, likely would be slightly lower — since the withholding adjustment starts close to midyear, the full credit won’t be paid out in paychecks.

For some, what’s effectively a loan from the government might be welcome. But others will find the big bill next year unwelcome. One way to prevent it: Adjust your withholding this year.

So be careful, and make sure that you’re not receiving double the benefit.  If you do, you may have an unwelcome tax bill come next year!

Will the $400-800 extra in your paychecks for the year make a difference? Have you started seeing it yet in your paycheck?

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When Will We See An Increase In Our Paychecks Due To The Stimulus Package?

This is a guest post from our good friends over at http://www.freefrombroke.com. Free From Broke is a great site with tons of great content about saving money and keeping you free from broke! Check out the site and subscribe to the RSS feed!

Does your employer offer a Transportation Spending Account?

photo credit: *Solar ikon*

This is an account where you can elect a certain amount of your gross pay to be taken out each paycheck for mass transit expenses (bus or train). You then apply to get the money back. What this does is it lowers your taxable salary (and we love tax savings!). The money you elect to take out isn’t taxed.

Thanks to Obama’s Economic Stimulus (the American Recovery and Reinvestment Act) the limit on the Transit account has been raised from $120 a month to $230 a month for 2009 and 2010. This should be rolling out from employers now (if not give your benefits department a shout and make them aware).

Why should you take part in a Transit Account?

For 2009 that leaves us 10 months to take advantage of this benefit. Assuming you can declare the maximum $230, that’s $2300 to lower your taxable income.

Let’s see the savings per tax bracket (Single Taxpayer):

That’s a nice little bit of money for not so much work!

Keep in mind though this is something you would have to opt in to! You don’t automatically get this money (if you weren’t already taking part this year you may not be able to opt in until next year)!

I can’t say how well this will be broadcast to the public besides what’s already been put out there in the news. Make sure you take advantage of this tax advantage!

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New Economic Stimulus And Transportation Accounts

photo credit: katmere

What Benefits Will I See From The Stimulus Bill?

The last week or so I’ve been looking at the 2009 Economic Stimulus bill that was passed, and talking a little more in depth about what some of the benefits are that people can expect to receive.  We talked about home buyer tax credits, sales tax credits for new car buyers, and overall stimulus package benefits. Today I thought we could look at some of the direct benefits that people will see in their paychecks, tax returns, or in other ways.

• Making Work Pay Credit:  The stimulus bill will give a $400 credit per worker and a $800 credit per working couple.  Almost everyone will receive this.   The full credit would be paid to people making $75,000 or less ($150,000 per dual-earner couple).   A partial credit would be paid to those making above those amounts but no more than $100,000 ($200,000 for couples).  The credit would also be refundable, which means that even very low-income families who don’t make enough to owe income tax would be able to claim it. For most working individuals, the credit will be paid over time at roughly $15 per period, assuming 26 pay periods in a year. People who are self-employed can adjust their quarterly tax filings to account for the credit.
• One-time payments to those who don’t work:  For retirees, disabled individuals and others who don’t work, including Social Security recipients, the bill provides a one-time $250 payment. The money should arrive within 120 days of the bill’s signing.  More details here.
• Unemployment : In a normal year you would have to pay federal income taxes on federal unemployment benefits.  2009 will be different.   You won’t have to pay taxes on the first $2,400 in benefits you receive.  Hopefully you’ll be able to find a new job before long and this won’t be an issue!
• Health Insurance: If you get fired, your company is required, thanks to a law known as Cobra, to allow you to pay to keep your health insurance, generally for up to 18 months.   Problem is that it can be quite expensive.  If you were forced out of a job between Sept. 1, 2008, and Dec. 31, 2009 the federal government will now subsidize 65 percent of your health insurance premium for up to nine months. The caveat is that your income in the year you receive the subsidy cannot be more than $125,000 for individuals or $250,000 for married couples filing their taxes jointly.

So those are a few of the direct benefits individuals will see as a result of the American Recovery and Reinvestment Act.

How Will We Pay For The Stimulus?

Personally these things sound good on the face, but when you start adding all the dollar figures up, it’s hard to figure out where the money to pay for all of these things is going to come from.  Our grandchildren’s children are probably still going to be paying for all this! What do you think about these benefits that we’ll be seeing from this stimulus bill? Are the costs worth it? Check out this post for more details on how individuals will be affected by the stimulus package.

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How Much Extra Will I See In My Paycheck Because Of The 2009 Economic Stimulus Package?

Buy A New Automobile, Get A Deduction!

Earlier this year President Obama signed into law the economic stimulus package.  I posted about how individual taxpayers are affected by the stimulus bill, and looked at some of the things they can expect to receive.

One of the things added to the bill was a temporary provision that allows people who buy new automobiles in 2009 to deduct any state and local sales and excise taxes on that purchase from their taxable income.

Details of the sales tax deduction

• Deductions available to purchasers of new cars, light vehicles, RVs or motorcycles in 2009.
• Deduct state and local taxes and any excise taxes charged on the purchase.
• Available to those earning less than $125,000 ($250,000 for joint filers).
• You can deduct the sales tax on the first $49,500 of a car purchase

This deduction will be what’s known as an above-the-line deduction, which means you can take it regardless of whether you itemize other deductions on your tax return.

An Illustration Of How The Tax Deduction Works

Let’s look at a quick example of how the tax deduction would work in the real world. Let’s say you buy a new car for $20,000 this year, and had a trade-in of $9,000. Typically states would tax the difference between the new car and the trade, which in this instance would be $11,000.

At a tax rate of 6.5%, that would mean your deduction in this case would be about $715. Tax rates vary by state, so your deduction will be based on the tax rate in your state.

If you are buying a $20,000 car with no trade, you would reduce your taxable income by $1300 (at our example 6.5% tax rate).

The estimated cost of this provision is expected to be around $1.7 billion dollars.

Still confused about how the deduction works? Check out my article answering 7 common questions asked about the new car sales tax deduction.

I’ll Still Buy Used Cars

Personally this tax deduction isn’t enough to get me excited about buying a new car. For me, buying a 2-3 year old used car and paying cash is still the only way to go! As soon as a new car gets driven off the lot, it loses a huge chunk of it’s value. When buying a depreciating asset like a car I think it’s best to cut your losses as much as you can, and buy after the biggest chunk of it’s value has already disappeared. Check out this post on Dave Ramsey’s idea of how to drive free cars and retire rich and another about things to do, and not to do, when buying a used car!

Does this tax deduction make you more likely to buy a new car this year, or will you still buy used when the time comes?

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Sales Tax Deductions For New Car Buyers in 2009 Obama Economic Stimulus Package

Stimulus Package Good For First Time Homebuyers

The 2009 Economic Stimulus Package passed and was signed into law earlier this week.   On Wednesday I posted about what parts of the stimulus bill will affect individuals, and what benefits you can receive from the stimulus package.

Today I thought I’d take a closer look at one of those benefits that first time homebuyers can expect to receive if they buy a house this year, the $8,000 tax credit.  This really just makes it that much more of a buyer’s market!

What The Stimulus Bill Says

In Sec. 1006 of the 407 page Stimulus bill you’ll find the information about the home buyer’s tax credit.  It reads:

Extension of and increase in first-time homebuyer credit; waiver of requirement to pay

What does this mean?  It means that first-time buyers can claim a credit worth $8,000 – or 10% of the home’s value, whichever is less – on their 2008 or 2009 taxes.  To qualify for the credit, the home must be purchased between Jan. 1, 2009 and Nov. 30, 2009.

You cannot have owned a house for the past three years to qualify as “first time” buyer. You also must  live in the purchased house for at least three years, or you will be obligated to pay back the credit.

The tax credit does come with some income restrictions.  To get the credit, homebuyers have to earn less than $75,000 for singles or $150,000 for couples.   If you make more than that you may qualify for a partial credit.

Getting the credit should be pretty easy, just claim  it on your return. No other forms or papers should need to be filed, and if you have already completed your return, you can file an amended return to claim the credit.

How To Get Your First Time Home buyer Tax Credit

A review of the provisions of the first time homebuyer tax credit:

• You cannot have owned a home for the past 3 years to qualify as a “first time” buyer.
• It applies to homes purchased January 1, 2009 through November 30, 2009.
• You must keep the home for three years.
• The credit is refundable.
• The credit is for $8,000 or 10% of the home’s value, whichever is less.
• It phases out for incomes between $75,000 to $95,000 for single and $150,000 to $170,000 for couples.

Remember, when buying a home it’s best to buy something you can afford (no more than 25% of your income), to put down a large down payment (at least 20%), and to get into a fixed rate only 15 year mortgage if you can.  I talk more about this on my post about Financial Peace University’s lesson on real estate and mortgages.

Are you looking to buy a new home this year, and if so, will you qualify for this tax credit?   Do you think this will help to stimulate the real estate market? Tell us about it in the comments!

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First Time Homebuyer Tax Credit of $8,000 in 2009 Economic Stimulus Package

The Stimulus Bill Has Passed

Now that the $787 billion stimulus package has passed and been signed into law by President Obama, everyone is scrambling trying to figure out what they’ll get out of the deal.

CNN put out a post a couple of days ago detailing how the stimulus package would affect individual taxpayers. Here’s a summary of things included in the plan that may affect you.

photo credit: eschipul

Stimulus Package Benefits For Individual Taxpayers

Making Work Pay Credit: The bill provides a $400 credit per worker and a $800 credit per dual-earner couple. The full credit would be paid to people making $75,000 or less ($150,000 per dual-earner couple). A partial credit would be paid to those making above those amounts but no more than $100,000 ($200,000 for couples). The credit would also be refundable, which means that even very low-income families who don’t make enough to owe income tax would be able to claim it. For most working individuals, the credit will be paid over time at roughly $15 per period, assuming 26 pay periods in a year. Estimated cost: $116 billion.

One-time payments to those who don’t work: For retirees, disabled individuals and others who don’t work, the bill provides a one-time $250 payment. Estimated cost: $14.2 billion.

Break for higher income families: The bill includes a one-year provision to protect middle- and upper-middle-income families from having to pay the Alternative Minimum Tax. The AMT was intended primarily for high-income taxpayers but has in recent years threatened to engulf those lower down the income scale. Estimated cost: $470 billion.

Temporary deduction for car buyers: The bill would let those who buy a new car, light vehicle, recreational vehicle or motorcycle in 2009 deduct state and local sales taxes as well as any excise tax charged in the purchase. The deduction would be available to those earning less than $125,000 ($250,000 for joint filers). Estimated cost: $1.7 billion.

Temporary credit for home buyers: The bill increases the size of an existing temporary and refundable first-time home buyer credit to $8,000, up from $7,500. It also removes the requirement under current law that the credit be paid back if the buyer stays in the home for at least three years. And it would extend the credit’s expiration date to Dec. 1, 2009, from July 1. Those eligible for this credit must have purchased a home after Jan. 1, 2009, and before Dec. 1, 2009.  The full credit is available to those making $75,000 or less ($150,000 for joint filers). Estimated cost: $6.6 billion.

New temporary college credit: The bill introduces the American Opportunity Tax Credit, which would be in effect for 2009 and 2010. It expands the existing Hope Scholarship tax credit and would be worth as much as $2,500 for higher education expenses, up from $1,800 currently.  The full credit would be available to those making less than $80,000 ($160,000 for joint filers). Those making between those amounts and $90,000 ($180,000 for joint filers) would get a partial credit. And the break would also be partially refundable, meaning lower income families with little or no tax liability could now claim some of the credit. Estimated cost: $13.9 billion.

Temporary Pell Grant increase: The bill increases the maximum Pell Grant by $500 to $5,350 in 2009 and $5,550 in 2010. Estimated cost: $15.6 billion.

Temporary expansion of child tax credit: The bill increases eligibility for the child tax credit by lowering the income threshold that must be met for the credit to be refundable. The threshold would be lowered to $3,000 for this year and next. That will allow lower income families to claim more of the credit than under current law. Estimated cost: $14.8 billion.

Temporary increase in earned income tax credit: The credit will be temporarily increased to 45% from 40% of qualifying earnings for low-income families with three or more children. It also includes a marriage penalty relief provision for couples who qualify for at least a portion of the credit. Estimated cost: $4.6 billion.
Direct lifeline benefits

Health insurance help for the jobless: The bill includes provisions to help eligible jobless workers pay for health insurance under Cobra. Cobra coverage allows newly unemployed workers to keep health insurance provided by their former employers for a period of time.

For workers who have been laid off between Sept. 1, 2008, and Dec. 31, 2009, the government will subsidize 65% of their premiums under Cobra for up to 9 months.

Those people laid off between Sept. 1, 2008, and the day the stimulus law goes into effect, and who did not sign up for Cobra, will get an additional 60 days to do so and receive the subsidy.

The subsidy will be limited to those whose income for the year is $125,000 or less ($250,000 for couples filing jointly). Estimated cost: $24.7 billion.

Another provision provides states funding to help pay for expanded Medicaid rolls for workers who’ve lost their jobs and can’t afford health care on their own or can’t get Cobra coverage because their former employer doesn’t offer a health care plan. Estimated cost: $87 billion.

Unemployment benefits: The bill provides jobless workers with an additional 20 weeks in unemployment benefits, and 13 weeks on top of that if they live in what’s deemed a high unemployment state, of which there are now about 30. Estimated cost: $27 billion.

In addition, the weekly unemployment benefit will temporarily increase by $25 on top of the roughly $300 jobless workers currently receive. Estimated cost: $8.8 billion.

Plus, the first $2,400 of benefits in 2009 would be exempt from federal income taxes. Estimated cost: $4.7 billion.

Food stamp payments: The bill includes a provision would increase food stamp payments by 13.6%, so a family of four would see an additional $80 on top of the $588 per month they receive currently. Estimated cost: $19.9 billion.

The bill also provides assistance to help local groups providing food and shelter, elderly nutrition services such as Meals on Wheels, and a program to help food banks re-stock their shelves. Estimated cost: $350 million.

Other help for needy families: The bill provides funding to states to create a contingency fund through 2010 for the welfare program called Temporary Assistance for Needy Families, which provides cash assistance to the needy. Estimated cost: $2.4 billion.

What Do You Think?

So those are some of the main provisions affecting individual taxpayers in the “stimulus” bill.

Which points will you qualify for, and how much will you be getting from the stimulus?  Tell us your thoughts in the comments!

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How The Stimulus Package Will Affect Individuals: What Will I Get?