Donating a car to charity - Is it worth it?
Donating a car to charity sounds simple and appealing. Just hand over the keys to your favorite good cause, accept a receipt in return, and write the Blue Book value off on next year’s taxes. It’s a quick method of passing on Old Paint, clearing the garage for your shiny new investment, and making April a gentler, kinder experience, all at the same time. Right?
It used to be. But in 2004, the tax law changed, Congress closed that IRS loophole, and now donating a car is one of the quickest ways to trigger an audit. To add insult to injury, you might not get more than $50 off your taxes for your pains.
The change in laws came about because too many people were deducting, not the fair market value of the car, but the retail price, which is always substantially higher and which isn’t what the law allowed. Besides, the charities weren’t gaining all that much, either. Without volunteers to effectively resell the cars being handed over, many charities merely dumped them at auction, receiving pennies on the dollar and paying much of that in fees and commissions to businesses that sprouted overnight to handle the influx.
So the IRS tightened their oversight, auditing such returns more aggressively, and changed the rules. Now the amount of your deduction depends less on the value of the car and more on the charity’s end use of it.
No matter the IRS rulings, many charities still lack the resources to resell a donated car for its full value and wholesale auctions remain the major method of resale. If this is how your favorite good cause disposes of Old Paint, you can expect to receive a receipt for around $50 to itemize on your Schedule A. Without substantial other deductions to bolster that, there’s little point. With this being the case, as you can imagine, car donations to many charities have dwindled to a trickle.
Full Deduction Car Charities
However, if the charity in question is set up to actually make use of the car in its operations, that’s a different matter. Some charities, for example, use donated cars to deliver meals to shut-ins, rehabilitate drug addicts and teach them to be auto mechanics, or as pass-along donations to needy families without other transportation.
Donations of cars to these charities are ballooning, because here the full deduction of the car’s fair market value remains intact.
If you do decide to donate your car to charity, here are a few things to keep in mind to make the experience as painless and profitable as possible for everyone involved—including the charity:
Ask for a copy of the charity’s IRS determination letter, which states they’re eligible to receive such donations, as well as a receipt for the car upon delivery.
Do the paper work
Fill out the proper IRS forms at tax time. If the donated car is worth more than $500 but less than $5,000, you need Section A of Form 8283; if it’s worth more than $5,000, fill out Section B of the same form.
Value the car fairly. If it’s a clunker, this isn’t so important, but if its value is $5,000 or higher, then be prepared to prove that in the event of an IRS audit. Take photos, gather your records together, and get the actual value from one of the trade publications, such as the National Auto Dealers Association (NADA) guides, the Kelley Blue Book, or the Hearst Black Book. Honestly factor the car’s mileage, condition, and maintenance history into this valuation. If these show the value to be above $5,000, you’ll need an independent appraisal, as well. Online services such as Edmunds.com can help with this process, as they provide accurate valuations for what similar cars are worth in your part of the country.
Make certain the charity follows through. Within 30 days of the donation, you should receive a statement from them regarding their final disposition of the car (unless this was cast in stone at the time of donation). If it’s been sold, you should receive a promise that it was sold at arm’s length, between disinterested parties, as well as the amount of the purchase price, which is the number you can itemize on your Schedule A. If they’ve utilized it within their operations, as discussed above, then they may be required to notify you accordingly, which means you can itemize the full value of the car.
Get Professional Advice
Most importantly, remember that the IRS will hold you responsible for what’s on your taxes and good intentions won’t help. In the end, everyone’s financial circumstances are unique and complicated decisions are often best discussed with a qualified tax consultant in advance. Only then will you know you’re making the best decision for yourself and your family.