by Andrew D. Schwartz, CPA

Our elected officials in Washington are at it again.  This time, the federal government is borrowing up to $1 billion to provide individuals and businesses with an incentive rebate of either $3,500 or $4,500 for replacing an older vehicle vehicle with one that is considerably more fuel efficient.

On June 24th, President Obama signed the Consumer Assistance to Recycle and Save Act of 2009 into law.  The new rules implemented the Car Allowance Rebate System (CARS) that give you until as late as November 1, 2009 to trade in your clunker for a new more fuel efficient vehicle.

According to these new rules, your clunker only qualifies as a clunker if these four conditions are met:

• The vehicle is less than twenty-five years old.

• The vehicle is in working condition.

• You have owned and insured the vehicle for at least a full year prior to the date of trade-in.

• The combined estimated new EPA MPG is less than 18 miles per gallon according to www.fueleconomy.gov.

Determining whether a replacement vehicle qualifies you for the incentive rebate is considerably more challenging.  Different rules apply to passenger vehicles, small trucks, mid-sized trucks, and large trucks.

For passenger vehicles, only those models that get at least 22 miles per gallon count.  To qualify for the $3,500 incentive, the fuel efficiency of your new car must be at least 4 miles per gallon better than your trade-in.  See your fuel efficiency jump by 10 miles per gallon or more, and you qualify for the maximum $4,500 voucher.

Small trucks, which include SUVs, small and medium sized pickup trucks, and small and medium sized minivans, must meet a minimum qualifying fuel efficiency of 18 miles per gallon.  With these types of vehicles, you'll qualify for $3,500 with an extra 2 miles per gallon or $4,500 with an extra 5 miles per gallon.

Mid-sized trucks include vans with a wheelbase of more than 115 inches and pickup trucks with a wheelbase of more than 124 inches.  The minimum qualifying fuel efficiency for these vehicles is 15 miles per gallon. Increase the fuel efficiency by just 1 mile per gallon to qualify for the $3,500 rebate.  Two miles per gallon extra gets you the full $4,500 rebate.

Other Advantages:

Unlike most tax breaks issued over the past twenty years, there is no income limitation for this electronic voucher program.  Plus, individuals and businesses are equally eligible.  Leasing counts as well, as long as the lease is for a period of at least five years.

This electronic voucher can also be used with other tax breaks.  If you purchase a hybrid that still qualifies for the Hybrid Car Tax Credit, you can claim the allowable tax credit even if you get the full $4,500 incentive rebate.  And as we discussed in our March 2009 Newsletter, don't forget that you can deduct the sales taxes paid on new vehicles purchased between 2/17/09 and 12/31/09, subject to phase-outs starting at $125,000 for single individuals and $250,000 for married couples.

One other benefit is that the dealership takes care of all of the paperwork on your behalf, allowing you to immediately receive your incentive rebate at the time of purchase. You don't need to wait until you file your tax return next winter to get your rebate check for $3,500 or $4,500.

Pitfalls to CARS

There are a few pitfalls to the CARS program, however.  For starters, the maximum manufacturer's suggested retail price of the replacement car is limited to $45,000.  Plus, used vehicles don't qualify as a replacement vehicle, even though replacing a clunker with a more fuel efficient used car would probably be more environmentally friendly. 

Another pitfall is that you're not eligible to receive both the electronic voucher and the vehicle's trade-in value, since one of the conditions of this program is that your vehicle be destroyed.  The amount you get for a trade, therefore, will be limited to its scrap value.  The closer the value of your car is to $4,500, therefore, the less valuable this rebate becomes, so make sure to check out your car's Kelley Blue Book value at www.kbb.com before opting to go with CARS.

Clock Is Ticking

Please note that this incentive program ends on the earlier of November 1, 2009 or when the $1 billion earmarked for the CARS program has been exhausted.  More information about the this incentive rebate program is available on the government sponsored website, www.cars.gov.

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2008 & 2009 TAX FACTS

• For 2008, the standard deduction for a single individual is $5,450 and for a married couple is $10,900 and increasing to $5,700 and $11,400 respectively in 2009. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
• For 2008, the personal exemption is $3,500 increasing to $3,650 in 2009. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes is $106,800 for 2009, up from $102,000 for 2008.
  
• The standard mileage rate is $.55 per business mile as of January 1, 2009, down from $.585 per mile as of December 31, 2008.
  
• The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2009.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account this year.
• The maximum annual contribution to your IRA is $5,000 for 2009.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2010 to make your 2009 IRA contributions. 

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