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.
Beware of Car Donation Scams
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, anyone donating a car 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. Donating a car is 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.
Make Sure Your Donated Cars Will Be Well Spent
So how can you protect yourself from car donation scams? And what about these new tax rules?
Begin by asking a lot of questions of the charity you are donating a car to.
- Find out what percentage of the proceeds from sales of donated cars will go to the organization.
- Find out whether the charity intends to sell the car donation 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 when donating cars:
- 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 accepts car donations, 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 you are donating cars to is viewed as a tax-exempt organization in the eyes of the Internal Revenue Service (IRS).
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 any donated cars 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 Car 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.