We interrupt our tax tales with a breaking story. There is a lot of myth going around about the taxability of the Cash for Clunkers Program. Some news programs have said that you will owe income taxes on the credit. That is not correct. According to Section 1302(h)(2) of the Act creating the program the $4500 is excluded from gross income. Most state income taxes adopt the IRS definition of gross income. As a result there should be no income tax on the money received. However, for sales tax purposes, you would have paid full sales tax in many states for the purchase price of the car including the amount paid by the Government. Some commentators have gotten confused by this. But clearly there is no income tax on the Cash for Clunkers Program. However, the dealers will pay tax on the rebates received by them, because it goes into their pocket as a gross receipt (this is of course off-set by Cost of Good Sold, inventory deductions, and other deductions).