Congress acted just before its August recess to keep a popular car trade-in program alive. The new Car Allowance Rebate System (CARS) -- formerly called the "cash for clunkers" program -- was extended on August 7 with an additional $2 billion injection of government funds. That means that your auto dealer is still prepared to give you a tax-free discount of up to $4,500 for replacing your current vehicle with a more fuel-efficient model.
But the CARS discount isn't available on all trade-ins. To qualify, you must meet certain requirements. For starters, any car that you're trading in must be a 1984 model or newer. Also, you must have owned, registered, and insured it for the year preceding the trade-in. (The insurance requirement doesn't apply in New Hampshire and Wisconsin.)
On the other side, the sticker price for the replacement car can't exceed $45,000. If your current car has a fuel economy of 18 miles per gallon or less, you must replace it with one with a rating of 22 miles per gallon or more. This entitles you to a discount of $3,500. The discount increases to $4,500 if the difference is ten miles per gallon or more.
This new break may be claimed if you buy the replacement car or you lease it for at least five years, but it's not available for used cars.
Similar subsidies are allowed for trade-ins involving SUVs, vans, and light trucks. For example, if the new vehicle is an SUV with a fuel economy of at least two miles per gallon higher than the trade-in, but less than five, the discount is $3,500. If it has a fuel economy of at least five miles per gallon more than the traded-in vehicle, the discount is $4,500.
How do you determine a vehicle's fuel economy? The government has established a website at www.cars.gov to answer this and other questions about the CARS program. The CARS program is subject to change due to the funding limits, so check this site as needed for updates.