New Tax and Government Incentives for New Vehicle Purchases

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July 17, 2009
James E. Duffy

Cash Rebate on New Car Purchases

In June 2009, new legislation was passed which established the Car Allowance Rebate System (CARS).  Under the CARS program, consumers get a rebate when they trade in their used vehicle to purchase a new, more fuel efficient vehicle between July 1, 2009 and November 1, 2009.  Automobile dealers registered to participate in the CARS program can apply a $3,500 or $4,500 credit towards the purchase or lease of a new vehicle when the purchaser trades in a less efficient, used vehicle.

To qualify for the program, a trade-in vehicle must:

1) be in drivable condition;
2) have been manufactured within the last 25 years (trucks with a GVWR between 8,500  and 10,000 pounds must have a model year of 2001 or later);
3) be continuously insured;
4) be registered to the same owner for the full year preceding the trade-in; and
5) have a combined city/highway fuel economy of 18 mpg or less. 

You can determine the fuel economy of your trade-in vehicle by visiting the government website: http://www.fueleconomy.gov/feg/sbs.htm.  

The CARS program credit only applies to new (not used) vehicles with a MSRP of $45,000 or less.  The credit also applies to new vehicle leases if the lease is for five years or more.  The credit amount depends on the new vehicle’s fuel efficiency compared to the fuel efficiency of the trade-in. To receive a $3,500 credit, the new vehicle’s fuel efficiency must be

1) at least 4 mpg higher than the trade-in if the new vehicle is a passenger car;
2) 2 mpg higher if it is a SUV, small/medium truck or van; and
3) at least 1 mpg higher if it is a large truck or van.

To receive a $4,500 credit, the new vehicle’s fuel efficiency must be

1) at least 10 mpg higher than the trade-in if the new vehicle is a passenger car;
2) 5 mpg higher if it is a SUV, small/medium truck or van; and
3) at least 2 mpg higher if it is a large truck or van.

Under the CARS program, trade-in vehicles must be destroyed, therefore the dealer is not going to pay you trade-in value for your car in addition to the rebate.  While dealers are not required to offer the full value for trade-in vehicles, the dealer must disclose the scrap value of the trade-in vehicle to the consumer.  Dealers can not use the CARS credit to offset any rebates or discounts and dealers may not charge additional fees for participating in the CARS program.  The CARS program credit can be combined with other incentives, including state and federal vehicle credits and manufacturer rebates and discounts.

Consumers can only use the CARS credit one time on the purchase of a single vehicle and only one credit will be issued for trade-in vehicles with joint registered owners. Credits received under the CARS program will not be considered as taxable income for the car buyer. 
   
Final rules and regulations have not been released; therefore, the above summary presents the most current information provided under the Act and through the NHTSA.

Sales Tax Deduction for New Car Purchases

There is a new tax incentive available for people who purchase a new vehicle between February 17, 2009 and December 31, 2009. Specifically, a person who purchases a new (not used) passenger car, minivan, small/medium truck, motorcycle, or motor home can claim an income tax deduction for the sales or excise tax paid on up to $49,500 of the vehicle’s price. Minnesota’s sales tax rate on motor vehicle purchases is 6.5 percent. The tax deduction is only allowed for one vehicle purchased in 2009.  You do not have to itemize deductions on your tax return in order to take this tax deduction; however, the deduction cannot be taken if you choose to deduct state and local sales taxes instead of state and local income taxes. The deduction is phased out for adjusted gross income between $125,000 and $135,000 year (for married couples for income between $250,000 and $260,000 a year). This tax deduction can only be claimed on 2009 tax returns.

Tax Credits for Energy Efficient Vehicles

Plug-In Electric Drive Vehicle Credit.  A new tax incentive will be available for people who purchase new, battery-powered four wheeled vehicles after December 31, 2009. A $2,500 tax credit will be issued for each electric vehicle that is purchased. Additional tax credits will be given to the purchaser if the vehicle has at least 5 kilowatt hours of capacity, allowing the purchaser to receive a maximum credit amount of $7,500. To qualify for the credit, vehicles must: 1) be new (not used); 2) have at least four wheels; 3) have a GVWR of less than 14,000 pounds; and 4) be propelled by a rechargeable battery with at least 4 kilowatt hours.  There is a similar tax credit for certain vehicles that do not exceed 25 miles per hour.

This tax credit is a new incentive for vehicle purchase next year.  There are existing incentives for the purchase of hybrid vehicles.

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