Cash For Clunkers, But No Tax Break In Md.

PERSONAL FINANCE

State Taxes Car's Full Cost

Other Tax Concessions Victims To Tough Times, Budget Pinch

August 04, 2009|By EILEEN AMBROSE

Mark Lecates took advantage of the "cash for clunkers" program about 10 days ago, getting $4,500 off the price of a new Honda Civic for scrapping his nearly 10-year-old Ford Explorer. He has no complaints, but he does have a question about Maryland taxes in the transaction.

The Baltimore resident paid state taxes on the full cost of the vehicle - before $4,500 was knocked off the price. His tax bill on the sale totaled around $1,025. By paying taxes on the clunker incentive, Lecates figures he paid an extra $270.

Lecates says he recalls reading that states wouldn't tax the incentive. What's up, he asks.

I went to the Maryland tax officials for the answer, as well as for information on other state tax breaks, such as a coming amnesty program for those who owe back taxes.

First, Lecates' question.

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 his 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 Lecates had bought his car up 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. A full or partial deduction is available to singles with income up to $135,000 and joint filers with incomes of up to $260,000.

Also, this is the month that some states typically offer a sales tax holiday to pump up back-to-school shopping. Alas, not so this year in Maryland, where the last tax holiday occurred in 2006.

The legislature, though, has approved a tax holiday for next year running Aug. 8 through Aug. 14 on clothing or footwear that's less than $100. Also, you won't have to pay sales taxes in Maryland the weekend of Feb. 19 through Feb. 21, 2011, if you buy an energy-efficient Energy Star appliance, such as an air conditioner, washer or dryer.

Hard economic times, though, have forced neighboring Washington to repeal its annual tax holiday this month to save a potential $640,000 in lost sales tax revenue. However, Virginia is holding a three-day tax holiday starting Friday on school supplies under $20 and on apparel that's less than $100.

Maryland soon will offer some relief for those behind in their taxes going back before 2008. The state will hold a tax amnesty program called Maryland Tax Do Over starting next month and running through Oct. 30. The amnesty will waive penalties and half the interest you owe if you pay your back taxes. Also, if you make a 10 percent down payment on the amount due, you can pay off the rest under a repayment plan that runs through the end of next year, says Christine Feldmann, a spokeswoman with the Comptroller of Maryland.

Amnesty is available to individuals or businesses with fewer than 500 employees in the United States. You must meet certain requirements to be eligible. For instance, if you participated in the last amnesty program in 2001 because you were behind on income taxes, you won't be able to apply for amnesty again if the reason is that you are once more behind on income taxes, Feldmann says.

Maryland Tax Do Over is expected to bring in $5 million to $10 million to the state. That last amnesty brought in $39.5 million.

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