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Origins: People are often surprised to find out that zero-cost items (e.g., prize winnings, free goods offered as marketing promotions, items given as gifts) may not require any immediate outlay of money, but they frequently do later — in the form of taxes on the value of the goods and services received. One group recently caught by such a surprise was some consumers who took advantage of the federal government's CARS program (commonly known as Cash for Clunkers), which offered incentives of up to $4,500 to those who traded in qualifying clunkers and purchased new vehicles. Although incentives received through participation in the CARS program are not taxable at the federal level, residents of some states may have to pay some form of state and/or local taxes (such as excise or sales taxes) on the value of the incentives. Residents of Maryland, for example: As it turns out, each state determines whether to tax the clunker money. Pennsylvania doesn't, for example, but Maryland applies its 6 percent excise tax to the incentive.We treat that $4,500 as a down payment toward [the] car. We still tax the total value of the car, says Caryn Coyle, a spokeswoman with the Maryland Motor Vehicle Administration, which collects the excise tax.And you can't, say, travel up to Pennsylvania to buy your new car there to avoid the Maryland excise tax. States have pacts with one another to collect taxes owed on car purchases by residents in other states, Coyle says. So a Pennsylvania dealer would have charged the Maryland excise tax anyway if [the car had been bought there].If it's any consolation, there's no federal tax on the clunker incentive and you may be able to deduct on your federal tax return any state or local taxes paid on a new vehicle purchased this year from Feb. 17 through Dec. 31.And Nebraska: Nebraskans who take advantage of the government's Cash for Clunkers rebate might be surprised to learn those rebates of $3,500 or $4,500 don't reduce the amount of sales tax a car buyer must pay.State Tax Commissioner Doug Ewald says he's received a number of complaints since the program started, but officials anticipated the issue and made sure that dealers knew about it beforehand.Nebraska law treats the government's clunker rebates as a third-party rebate, so they don't reduce the taxable value of the new car like a trade-in or manufacturer's rebate does.So someone buying a $25,000 vehicle with the $4,500 clunker rebate would still have to pay taxes on $25,000.And South Dakota as well: [M]any of those cashing in on the clunkers program are surprised when they get to the treasurer's office windows. That's because the government's rebate of up to $4500 dollars for every clunker is taxable.They didn't realize that would be taxable. A lot of people don't realize that. So they're not happy and kind of surprised when they find that out, [Minnehaha County Treasurer Pam] Nelson said.In North Carolina, however, the CARS incentives are subject to neither the state's highway use tax nor its income tax: According to the North Carolina Department of Motor Vehicles, the highway use tax should be calculated on the final sales price of the purchased vehicle less the amount allowed for the trade in.As an example, if you bought a car with a $20,000 price tag and the dealership gave you $3,000 for your trade-in, then you got the $4,500 Cash For Clunkers incentive, you paid $12,500 for the car. That's the amount you've paid plus 3% as the standard Highway Use Tax. Hence, you are not paying taxes on the $4,500.The North Carolina Department of Revenue says because the incentive is taken as a coupon at the dealership, you will not have to file it as income on your taxes.Consumers who took advantage of the CARS program should check with their state tax departments for information about whether such incentives are taxable in their home states.
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