There has been a ton of confusion about whether money received through the Cash for Clunkers program is taxable.  What follows is my opinion of both the cause of the confusion and the reality of the situation.  Much of the confusion is based on a news article quoting Minnehaha County (South Dakota) Treasurer Pam Nelson.  In the article Some Surprised by ‘Clunker’ Tax, she is quoted as saying (regarding CARS participants)   “They didn’t realize that would be taxable. A lot of people don’t realize that. So they’re not happy and kind of surprised when they find that out”

When people started hearing that the Cash for Clunkers credit was taxable, they may have falsely concluded that it was subject to federal income tax.  This does not seem to be the case.  The official CARS website specifically states that the credit is not taxed as income to the consumers that participate in the program.  So you will not have to pay federal income tax on the credit as you might for a forgiven or canceled debt.

That is not to say that the Cash for Clunkers’ credit is free from tax.  In many states

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My results from the third month of my Passive Versus Active Portfolio Experiment have been in for a while, but I’m just now getting around to publishing them.  They are as follows:

Month 3 Results

Passive: I had one transactions this month; a dividend reinvestment. My passive portfolio increased by a total of 6.20%. This gain includes the commission that would have been charged had I liquidated my position at the end of the month.  My dividend reinvestment is not subject to a commission.

Active: I had three transactions this month; 1 purchase, 1 dividend, and 1 sale. My active portfolio increased by a total of 0.88%. This gain includes commissions.

Benchmark: During the same time period, the S&P 500 increased by 3.62%.  For the second time, one of my investment portfolios (active) failed to beat the benchmark for the month.  My passive portfolio significantly outperformed the benchmark this past month.

Overall Results to Date

After three months, my passive investments have grown their lead

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As regular readers have probably picked up on, I’ve been in the process of relocating once again.  This should be the last move for a very long time, perhaps ever.  I loved my time in the Midwest (and it certainly had its advantages), but I’m happy to be back in New England.  While many costs between the two locations are similar, there are a few differences worth considering.

Housing

This is the major difference.  In the Midwest, people complained about the high cost of housing, but they really had no idea how inexpensive it was.  One woman lamented that “you can’t even get a starter home for under $60K any more.”  I hate to tell her, but a comparable home here in New England costs upwards of $300K.  Out there we built a brand new, 5 bedroom home with all the upgrades for just over $200K.  Here we found a wonderful 4 bedroom home, built in the early 70s, that cost well over twice as much.  My mortgage payment basically tripled.  Higher property value also means

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My results from the second month of my Passive Versus Active Portfolio Experiment are now in.  They are as follows:

Month 2 Results

Passive: I had one transactions this month; a dividend reinvestment. My passive portfolio increased by a total of 10.32%. This gain includes the commission that would have been charged had I liquidated my position at the end of the month.  My dividend reinvestment is not subject to a commission.

Active: I had five transactions this month; 3 purchases and 2 sales. My active portfolio increased by a total of 1.91%. This gain includes commissions, including the one I would have been charged had I liquidated my third position at the end of the month.

Benchmark: During the same time period, the S&P 500 increased by 1.97%.  For the first time, one of my investment portfolios (active) failed to beat the benchmark for the month.  My passive portfolio significantly outperformed the benchmark this past month.

Overall Results to Date

After two months, my passive investments have taken the lead in profitability.  Both my passive and active investments have beaten the benchmark return of the S&P 500.

Passive Return to Date:  21.56%

Active Return to Date:   13.99%

Benchmark Return to Date:  10.69%

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The Cash for Clunkers law is intended to jump start the auto industry by inspiring people to purchase new cars.  Touted secondary benefits include aiding consumers in new car purchases and various environmental benefits.  The program offers vouchers towards the purchase of a new car when an older, lower MPG car is traded-in.  The restrictions of the law make the program much less effective than it could have been and most consumers may be better off skipping the program entirely.

The voucher you receive would start at $3,500.  Your passenger car clunker must be at least 8 years old and have fuel efficiency at least 4 MPG worse than the new car.  If it’s 10 MPG worse, then you could get the larger voucher, worth $4,500.

If your car is at least 8 years old, congratulations.  Owning vehicles for a long time is a favorite technique of the frugally minded.  Driving a more fuel-efficient car sounds like a money savings potential as well.  So what’s the problem with the Cash for Clunkers program?

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Look to nearly any personal finance blog or advice column and you’re likely to hear similar advice regarding investments.  It generally goes something like this: “Very few investors (and probably zero novices) can successfully time the market to get better returns.”  I myself have made the statement many times.  The concluding advice is to invest passively in low cost index funds and be satisfied to match the market, since the probable alternative of active investing is to under-perform the market.

Though I genuinely believe this prevailing wisdom, I wanted to ensure that it’s the case not for the average investor, but for me as an investor.  I’m not suggesting that I’m better or worse than average, but my performance is really the only one that matters to me and yours should be the only one that matters to you.

Setting Up The Experiment

I created and funded a new brokerage account for the sole purpose of comparing the two investment methods.  I intended to use half of my money passively and the other half actively.

Background Info

My passive investment would be a

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This is a guest post by Trisha Wagner, a freelance writer for DepositAccounts.com, where you can compare rates of checking accounts from dozens of banks in one place. Trisha writes regularly on the topics of personal finance and savings accounts.

If you have been paying attention to the news in recent weeks, you probably know that legislation to regulate the billing practices of credit card issuers is a hot topic. As more and more Americans struggle to keep afloat during the recession, this credit card reform at first seems like a win-win situation for everyone. Unfortunately that is not the case. In fact, the rules that are supposed to help consumers may inadvertently backfire making the situation worse for all credit card holders. Here are a few changes card holders can expect as a result of the credit card reform.

Someone has to pay

That someone will likely be card holders who have managed their accounts responsibly in the past. Consider the fact that in addition to limiting the ability of card issuers to charge whatever they please, banks are hemorrhaging money due to account holders defaulting on their payments. In an effort to recoup the money banks make on interest, fees and other penalties, it is likely they will turn their attention to people who are able to pay their balances.

It will be more difficult to get credit

Credit cards will no longer be handed out like candy at Halloween. Forget about fair or good credit, expect to see only those at the highest end of the credit score spectrum getting credit in the immediate future.

The return of annual fees

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More on this topic (What's this?)

Beware the M2 Credit Card (Canadian Financial DIY, 5/25/10)

New Credit Card Minimum Payment Rules (Michael James on Money, 6/9/10)

Read more on Credit Cards at Wikinvest