If you traded in a clunker worth $3500, you get $4500 off for an apparent "savings" of $1000.
However, you have to pay taxes on the $4500 come April 15th (something that no auto dealer will tell you). If you are in the 30% tax bracket, you will pay $1350 on that $4500.
So, rather than save $1000, you actually pay an extra $350 to the feds. In addition, you traded in a car that was most likely paid for. Now you have 4 or 5 years of payments on a car that you did not need, that was costing you less to run than the payments that you will now be making.
But wait, it gets even better: you also got ripped off by the dealer.
For example, every dealer here in LA was selling the Ford Focus with all the goodies including A/C, auto transmission, power windows, etc for $12,500 the month before the "cash for clunkers" program started.
When "cash for clunkers" came along, they stopped discounting them and instead sold them at the list price of $15,500. So, you paid $3000 more than you would have the month before. (Honda, Toyota, and Kia played the same list price game that Ford and Chevy did).
So lets do the final tally here:
You traded in a car worth: $3500
You got a discount of: $4500
Net so far +$1000
But you have to pay: $1350 in taxes on the $4500
Net so far: -$350
And you paid: $3000 more than the car was selling for the month before
Net -$3350
We could also add in the additional taxes (sales tax, state tax, etc.) on the extra $3000 that you paid for the car, along with the 5 years of interest on the car loan but lets just stop here.
So who actually made out on the deal? The feds collected taxes on the car along with taxes on the $4500 they "gave" you. The car dealers made an extra $3000 or more on every car they sold along with the kickbacks from the manufacturers and the loan companies. The manufacturers got to dump lots of cars they could not give away the month before. And the poor stupid consumer got saddled with even more debt that they cannot afford.
Obama and his band of merry men convinced Joe consumer that he was getting $4500 in "free" money from the "government" when in fact Joe was giving away his $3500 car and paying an additional $3350 for the privilege.
DelMarVa's Premier Source for News, Opinion, Analysis, and Human Interest Contact Publisher Joe Albero at alberobutzo@wmconnect.com or 410-430-5349
24 comments:
I would like to repost this here as well:
Trashing perfectly good cars is a waste of time, money and materials. I'm just waiting for the inevitable reprecussion of this program in a few months when (not if) employment continues to rise and people start losing their jobs and income. We are going to have a massive amount of people defaulting on their loans for these new cars. Then what? I'dd be will to bet that these people probably bought cars that they probably couldn't afford to begin with, but the dealerships gave them loans anyway because they were so strapped for business. The financiers can't simply repo the cars and break even because (as most SMART car buyers know) the borrower will be up-side-down on the loan since new cars depreciate by approximately 33% as soon as you drive them off the lot. So when the goverment freeloader defaults on his $25,000 (plus taxes, tags and title) Honda Accord, he may have received $4,500 but that car is now only worth $16,500 and not the estimated $20,500 he owes. Now what happens? Bankruptcy? Foreclosure? Failure to pay other financial responsibilities? It will dominoe down and other aspects of the economy will get hit.
If the government were smart (like the smart people that buy new cars the RIGHT way) they would have required the buyer to put an additional down payment on the vehicle that would cover the estimated immediate depreciation. At least this way, we would know that the people using this program are the ones that saved money and chances are haven't been the existing burden on the government before. Every SMART new car buyer knows that you should at least put down a very hefty down payment or pay for the car in full, cash! A new car is the WORST INVESTMENT A PERSON CAN MAKE! You can NEVER prosper off of buying a new car-you only lose! It just goes to show me that our federal government makes poor investment decisions (as if that wasn't already evident). People weren't and aren't buying new cars because they can be considered luxeries, not necessities (In addition to domestic cars being garbage). The general US population was doing the right thing and tightening its belt during these tough times and the feds forced a few to loosen it up!
By-the-way, notice I used a Honda Accord for an example. That's because the program didn't work as intended. We sent the majority of the money from the program over seas and not to US auto makers. I don't blame them-with the exception of a few domestic pick-ups, foreign car manufacturers produce a for superior vehicles! That's why I have nothing but Toyotas in my driveway and always will!
I'm surprised that people are just now figuring this out.
Dont forget the insurance. New car, higher insurance, not to mention you have to have full coverage on the new car.
People can read. Believe it or not Joe, you are not the smartest guy in the room. Still a gret deal with benefit. Stimulated auto sales, gets gas hogs off of the roads.
Many of us tried to tell people this was not a deal.
The government never gives you something for nothing.
Those who fell for this program deserve what they get. They should have been smarter and realized it really wasn't a deal.
To those who will have their car repossesed in the next several months because you went from NO payment to a payment you cannot afford, you, too, deserve what you get.
Wake up people! Geesh! Didn't you learn anything from the "mortgage crisis"?
I said it before (when this program first started) this was the same thing in a different market!
Joe-Please move to the front of the math class. That an A++++.
thank God I kept my clunker!
You are absolutely correct. Great post. WE are idiots!
Stupid move to sell new cars and sucker the public again. New cars are always a bad financial move.
I didnt have to pay taxes for my $4,500. Things went smooth. Yes I do have a car payment of $210, but heck its better than what I had. Im sure there are good news and bad news about this but I got the good out of it.
I kept my clunker with no car payment and liability insurance only. My husband tried numerous times to talk me into using this program. I certainly have printed off this article for him. Thanks for confirming my suspisions!
10:23 You didn't have to pay them but you will. Im sure you will be getting some type of extra form to fill out for your 2009 taxes.
You DON'T have to pay taxes on the $4500--that money would've been applied to the vehicle, hence making the bottom line of the vehicle lower, and therefore making you pay LESS sales tax than you otherwise would've. Since when have any of you bought a car with a rebate (I've bought several), and then had to pay taxes on it at the end of the year--never.
Now, if you took the rebate as cash in your pocket, sure that would've counted as income, and taxes would need to be filed. But since that cash is applied to the car, lowering the price of the car, then you don't claim that at the end of the year--look up the tax laws.
Now, the example Joe gave about the price increase of the vehicle from a month prior IS pretty accurate. Of course dealers are going to try and get as much profit as they can from a deal--ANY deal. A smart consumer would know how to haggle down the price and still get a great deal and make this program work for them. A smart consumer would also know when to walk away...
You guys are really trying to find anything you can to rag on an overall GOOD program.
Love a Toyota!
All good points, and illustrates: "Buyer beware"
I was, and still am totally opposed to the form of government bailout known as "Cash for Clunkers." However, two things to note:
1) Given the requirements for what qualified as a "clunker," few people turned in a vehicle that was worth $3,500 on the open market, so their pre-tax gain was much higher than $1,000. If they only made $2,000, they would still be a little ahead after taxes.
2) I doubt there are many people reading this blog who pay 30% federal income tax. If a married couple has a Taxable Income (that's after all deductions) of $200,300, then they are still in the 28% bracket. The next bracket up (which goes to $357,700) is 33% (that's 33% on income above $200,300, not all of it).
Again, I disagree with the program, but if I owned a clunker worth around $1,000, and someone offered to give me $4,500 for it, and if I had, say, $70,000 of taxable income (meaning I'd pay 14.6% in federal tax), even though I'd have to pay back $657 of my $3,500 windfall, then yeah, I'd think it was a good deal.
i love my 12 mpg ford f250...paid for....cost less to operate for a year than 3 monthly payments on a small car....plus it carries more ammo...lol
I have two cars that would have qualified for the "cash for clunkes", just worried about my job if Obamacare goes through. Did not want a car payment and house payment on unemployment.
i wont say youre wrong, but i looked at the 'rules' online for the CARS program. it says there are to be no taxes from the federal side on this. however, i also know politicians will find another way to get our money. but i urge you to go check out the rules on the government website.
I just went to the govt Cash for Clunkers website: www.cars.gov
On their FAQ page is the following:
Q: Is the credit subject to being taxed as income to the consumers that participate in the program?
A: NO. The CARS Act expressly provides that the credit is not income for the consumer.
===
I also found a number of news sites that said the rumor that the $4,500 is taxable "is spreading like wildfire across the internet" but it is untrue.
for my previous post - http://www.cars.gov/faq#category-06
"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."
and
"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."
I believe I benefited from this waste of taxpayer money by trading in a clunker with 171k miles and a bad transmission. The $4500 discount was great.
There is NO income tax on this $4500 as the Government gives the money to the dealer (not the buyer). Maryland however does count the $4500 when computing their titling tax. Delaware does not.
ROTFLMAO! The dems are really squirming on this Post, aren't they.
Hello and thank you for your post. The thing is that first of all people should learn to live without loans. Because if we continue living on dept, the situation will never get better and there will be more and more "bubbles" causing financial crisis and unemplyment.
Take care,
Elli
Ummm, no.
let's say the car you are buying is $20,000. Without the deal, you of course pay the full $20,000 plus tax.
With a $3500 trade in, you pay $16,500 plus tax up front and then, yes, tax on the $3500 (at 30% that would be an additional $1050). That's a total payment of approx 17,550.
If you get $4500 for that trade in, you payt $15,500 + (0.3 x 4500) = 15,500 + 1350 = $16,850.
So yes, you don't save $1000 but you do save $700.
You are conveniently neglecting the fact that you would have to pay tax on the $3500. You my friend are trying to dupe the public.
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