There are a number of e-mails that have been floating around for the last month or so claiming that you have made a terrible financial mistake if you took part in the CARS or Cash for Clunkers program. The main claim being that the rebate itself is taxable and can cause you pay more for the car by inflated prices and in taxes than you get the benefit of in the rebate.
I don't know much about the pricing or whether dealers inflated prices. And I can't tell you whether or not you can afford a new car instead of a running vehicle that is paid off. What I can tell you is that the rebate specifically is NOT considered taxable income on your Federal or state tax return. It simply is not true that you will owe taxes on the rebate. It is true that certain states charged sales tax on the rebate portion of the purchase price. Below is a resource for the states that did charge sales tax, but you paid the tax at time of purchase and can deduct the sales tax if you itemize your Federal return.
As always, if you have any questions or I can help you with your particular situation, please feel free to e-mail me at James(at)RainwaterCPA.com.