Car Tax Rebate: Government Car Allowance Rebate System

The car tax rebate system (Car Allowance Rebate System) is a government sponsored program and will give you a tax credit for purchasing a new, more fuel efficient vehicle when you trade in a less fuel efficient vehicle.

The CARS Act makes purchases and leasing on and after July 1 potentially eligible for the rebate. All the program details have not been figured out yet, so you might want to wait until a final rule on the program is issued around July 24, 2009. The CARS program runs until November 1, 2009 or when the fund runs out so you might want to look into this program sooner than later.

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The amount of the credit is either $3,500 or $4,500, depending on the type of vehicle you purchase and the difference in fuel economy between the purchased vehicle and the trade-in vehicle.

You don't need a voucher for this program, the dealer you buy the new car from will deduct the tax credit from the purchase price of the vehicle. The dealer has to be registered for this program in order for you to get the tax rebate.

Only new vehicle purchases are eligible and leased vehicles providing that the lease period is at least five years, used vehicle purchases are not eligible. There is also a cap on the new vehicle price of $45,000. The new vehicle can be a domestic vehicle or an imported vehicle.

Also to be eligible your current vehicle must be less than 25 years old on the trade in date, must have been manufactured not later than model year 2001  and your car must get 18 or less miles per gallon. Some very large pick-up trucks and cargo vans have different requirements.

Here is a big gotcha - your trade-in vehicle must be registered and continuously have auto insurance coverage for the prior year to the trade-in date. You can't buy a $500 clunker and expect to get a $3,500 or $4,500 credit. Your trade-in vehicle must also be destroyed, which lowers the estimated value to scrap value.

The credit does not count as income for the purchaser so you don't have to pay tax on the credit you receive. The dealer will pay the tax. The dealer is also prohibited from charging you any kind of extra fees if receive a tax credit for purchasing a new vehicle.

The National Highway Traffic Safety Administration (NHTSA) has created a website that can help you better understand the CARS act and to see if you're eligible.

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Update: July 24, 2009.

The final rule on the CARS Program, formally referred to Cash for Clunkers as been issued. Here are some examples of vehicles eligible for the voucher of either $3,500 or $4,500.

In a transaction involving a trade-in vehicle that is a passenger automobile, a category 1 truck, or a category 2 truck and a new vehicle that is a passenger automobile, if the new vehicle has a combined fuel economy that is 4 to 9 miles per gallon higher than the trade in vehicle, the credit is $3,500.

If the new vehicle has a combined fuel economy that is at

least 10 miles per gallon higher than the trade-in vehicle, the credit is $4,500.

If the transaction involves a trade-in vehicle that is a passenger automobile, a category 1 truck, or a category 2 truck and a new vehicle that is a category 1 truck each meeting the eligibility criteria, a gain of 2 to 4 miles per gallon results in a credit of $3,500; a gain of at least 5 miles per gallon results in a credit of $4,500.

In the case of a new category 2 or category 3 truck, the trade-in vehicle categories are different. For a new category 2 truck, the trade-in vehicle must be a category 2 or a category 3 truck. If the transaction involves two category 2 trucks each meeting the 36 eligibility criteria, a gain of 1 mile per gallon results in a credit of $3,500; a gain of at least 2 miles per gallon results in a credit of $4,500. A category 3 truck that is traded in for a new category 2 truck is entitled to a $3,500 credit, without fuel economy restriction.

Category 3 trucks are not rated for fuel economy by EPA. A category 3 truck that is traded in for another category 3 truck is entitled to a $3,500 credit if the new vehicle is “smaller or similar in size.”

Here are the truck categories

A category 1 truck is a non passenger automobile. This category includes sport utility vehicles (SUVs), small and medium pickup trucks and small and medium passenger and cargo vans.

A category 2 truck is a large van or a large pickup truck, based upon the length of the wheelbase (more than 115 inches for pickup trucks and more than 124 inches for vans). Note: some pickup trucks and cargo vans exceeding these thresholds are treated as category 3 trucks instead of category 2 trucks.

A category 3 truck is a work truck and is rated between 8,500 and 10,000 pounds gross vehicle weight. This category includes very large pickup trucks (those with cargo beds 72 inches or more in length) and very large cargo vans.