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Donating your clunker to snag a tax deduction seems easy. A parade of charities and third-party companies advertise that they’ll pick up your old car, hassle-free, in return for potential savings on your Form 1040. But the IRS has tightened the rules on these deductions, largely because of abuses. To reap the maximum benefit, you’ll need to understand both the tax rules and the car-donation business. Otherwise, that well-intended act of largesse could come back to run you over.
If your goal is to make money, donating for a deduction may not be the way to go. The deduction is worth only a fraction of the car’s value. If your marginal tax rate is 28%, a donated car worth $2,000 will generate a deduction of only $560. You could get more by selling the car yourself.
A federal law that went into effect in 2005 also limits taxpayers in setting the value of car donations. The changes have the biggest effect on donated cars worth more than $500. If the charity keeps the car and uses it for, say, delivering meals or carting around children, you can claim the fair-market value, determined by a service such as Consumer Reports Used Car Price Reports or Kelley Blue Book.
But if the charity arranges to have the car sold at auction, as most do, you can deduct only the amount that the charity gets for it. So if you donate a vehicle with a fair-market value of $2,000 and it’s sold for $1,500 at auction, you will get a deduction of just $420, assuming you’re in the 28% tax bracket.
Still, a lot of folks love the convenience and altruism of a car donation. To ensure that your contribution will be handled properly—and also remain eligible for a deduction—check up on the charity first.
- Find out if the charity is an IRS-approved 501(c)(3) organization. If not, your deduction could be disqualified. Approved charities are generally listed in IRS Publication 78, which is available at the IRS web site. Your church, synagogue, mosque, or temple might not be listed but still qualify.
- See how much of your donation will go to the charity. A 2003 survey by the Government Accountability Office found that charities often got as little as 5% of a donated car’s claimed value after processing and fundraising costs. So ask the charity’s development office what percentage of the sale price the charity will get.
- Consult the Better Business Bureau’s National Charity Reports Index, which rates charities on 20 accountability standards. Another nonprofit watchdog is Charity Navigator. It reports what share of a group’s donations actually go to good works.
Cover Your Back Bumper
To back up your deduction, make sure you have the name and address of the charity, the date of the donation, the place where you donated the car, a description of the car, and a written acknowledgement from the charity. Keep a copy of the title transfer. Report the transfer to your state motor vehicle department and cancel your car insurance. Remove license plates—unless state law says otherwise—as well as registration and inspection stickers. As the story below notes, you don’t want the next owner’s problems tailing you.
For more details on donating cars, get a copy of IRS Publication 4303, “A Donor’s Guide to Car Donations.”
The Gift Car That Backfired
Yolanda Raad thought she was giving her car to charity. Little did she know she was contributing to her own troubles.
In October 2007, Raad, an executive secretary from Massapequa Park, N.Y., donated her 1990 Plymouth Acclaim to the Brooklyn-based Heritage for the Blind. Shortly after, she began receiving summonses from New York City for violations on the car she no longer owned. Soon the tickets amounted to more than $2,000, for everything from double-parking to stopping in a no-standing zone.
The problem was that Raad had neglected to remove the registration sticker from her car. She thinks that the person it was sold or given to ran up the fines. The flurry of tickets came to a stop in July, around the time an article in Newsday publicized her plight. Two judges finally determined that she was not liable. “I wouldn’t donate a car again because of what I went through,” Raad told us.
Bennett Weiner, chief operating officer of the Better Business Bureau Wise Giving Alliance, recommends that you be present for the car pickup and insist on putting the name of the charity on the transferred title, regardless of what the organization—or the guy picking up the car—tells you to do.“Once the car leaves your property,” Weiner notes, “you don’t want to be liable for anything that happens to it.”