Donating Your Car
You've probably heard or seen the ads before. Donate your old car to a charity, and receive a tax deduction in return.
Sounds like a good idea. Do something nice for someone else and get rewarded for it. Is there a catch?
Maybe. Before you give away your vehicle, be aware of the potential pitfalls of car donation.
The car donation business attracts scammers. Sometimes the charitable organization itself is fake. Sometimes the people selling the cars are fraudulent. Sometimes, it's even the towing company that is taking people for a ride.
Even otherwise trustworthy citizens were getting in on the action until a few years ago. Before 2005, car donors could subtract the "fair market value" of their car on their taxes. Unfortunately, in many cases, the fair market value was hopelessly out of sync with reality. The true market value of the vehicle wasn't near the "book value" of the car, so some donors were getting an artificially high break on their taxes.
But the laws have since changed. We'll get to that in a bit.
The car donation business is big―and growing. Car donations are a great way to help fund charities. Today, most charities are in greater need than ever. Recent tragedies, like Hurricane Katrina, mean that people who usually donate to their local charity are donating to help these folks instead. There are only so many donations to go around.
Most charities contract someone else to run the car donation programs. This middleman must be paid, so the charity gets less money, sometimes only 20% of the selling price. And because these third-party brokers are loosely regulated, the potential for fraud exists here, too.
Make Sure Your Gift Will be Well Spent
So how can you protect yourself from cheaters? And what about these new tax rules?
Begin by asking a lot of questions of the charity.
- Find out what percentage of the proceeds from the sale will go to the organization.
- Find out whether the charity intends to sell the car or will keep it for its own use.
- Ask who's doing the actual selling and what percentage they charge.
Don't be bashful about asking questions. It's your vehicle, and this could be the biggest donation you'll make this year.
Other things to remember:
- Make sure you have the right charity. Many of them have similar names, and it's easy to confuse a local charity with one from far away.
- If your favorite charity doesn't advertise that it wants cars, ask anyway. Many need cars to use or would be willing to accept your car and then sell it.
If you still have concerns, contact your state attorney general's office or your local Better Business Bureau office for more information.
You should check to make sure that the charity is viewed as a tax-exempt organization in the eyes of the Internal Revenue Service (IRS). Most of these organizations will be listed in IRS Publication 78―Cumulative List of Organizations. Public libraries carry this publication, or you can check the IRS site to see what groups are on the list.
You can also ask the organization to show you a copy of its tax-exempt status determination letter.
Some organizations, such as churches, synagogues, and government entities, aren't listed in the publication. However, a donation to any of these organizations is still considered to be tax deductible.
It's a good idea to transfer the title of the vehicle to the organization and make a copy of the title transfer for yourself. Take a picture of your vehicle before handing it over.
Claim the Donation Deduction
Not surprisingly, the tax rules concerning car donations are a little confusing. It's best to check with the IRS or download IRS Publication 4303: A Donor's Guide to Vehicle Donations for complete details, but here are the basics.
- The amount of the deduction depends on what the charity does with your donation. The charity must tell you what its plans are.
- If the fair market value of the vehicle is less than $500, you may claim the fair market value as your deduction. Use a pricing guide to find out what this is.
- If your car is worth more than $500, you may only be eligible to claim the gross sales price of the car on your taxes, not the stated value. So, if the charity sells your car for $2,800, that's how much you may claim for your deduction.
- If the charity does something else with your donation, like keep the car or fix and sell it, you might be eligible to claim the fair market price of the car as your deduction. Consult the IRS site for details, or call the agency at (800) 829-1040.
- There are eligibility requirements about who may take this deduction. For instance, you must itemize your deductions in order to claim this write-off, and other restrictions apply. Again, it's best to consult with the IRS for complete details.
The charity is required to send you a notice of the sale within 30 days of the transaction. If the charity decides to keep the vehicle or make improvements to it, it must let you know within 30 days after it receives the car. You'll need to include the letter from the charity with your tax return.