When my aging Nissan Sentra began to need several hundred dollars' worth of repairs every few months, I considered donating the once trusty blue sedan to charity. I knew of several pet charities that would be grateful. Besides, donating a car seemed so much easier than selling it. No fixing it up. No phone calls. No Tom, Dick and Harriet knocking at my door — or standing me up on a Sunday morning as I waited for Godot.
The biggest incentive, though, came from the tax deduction. At the time, the IRS was allowing donors to deduct the "fair market value" of the donated car from their taxes. So donating the Nissan, whose market value was about $2,400, meant $792 off my taxes (assuming a 33-percent tax bracket). Every year, more than a million Americans donated their cars just like this.
Too good to be true
Unfortunately, whether through ignorance, confusion or greed, a substantial percentage of car donors have been deducting the full "suggested retail price" — what a dealer would get for reselling your trade-in — instead of the fair market value. That's far more than the IRS had intended, costing the government millions in lost tax revenue.
The charities weren't making much, either. Most of the donated cars were sold by the charities for a pittance at auction, and middlemen who administered the programs on behalf of the charities took a large percentage of those meager profits.
So in 2005, the IRS changed the rule. From then on, if your car is valued at more than $500, the deduction is limited to the charity's actual selling price. The donor must attach a statement of sale to the tax return in order to receive the deduction. (The charity is obligated to provide the statement within 30 days.) You are not entitled to know the deduction amount before donating your car.
That leaves most donors in the dark — and may leave some businesses and charities in the red.
Good for government = bad for business?
Taron Reeves owns America's Car Donation Charities Center, one of many commercial fundraisers that give a percentage of profits to their charity members. Donations through Reeves' company went down 30-35 percent after the new law went into effect. What's worse, his overall profits have dropped a full 50 percent, as owners of "higher-value cars" — anything more than $2,000-$3,000 — stayed away in droves.
Since the average car that Car Donations Charities Center now receives for charity is valued at only $250-$300, Reeves has had to cut back on his overhead and expenses to maintain his non-profit business. A native Texan, Reeves says he now has to work a little smarter and a little faster than he used to; nevertheless, he remains undaunted.
"There are lots of cars out there," he said. "I look at one that's sitting in someone's yard, waiting to be donated and say, 'That's a $50 bill just flapping in the wind right there.'
"As long as we can accommodate the donor and not lose money for the charity, we'll do it."
As one door closes, another opens
Since the biggest loss for consumers is for those who own higher-value used cars, should they give up hope of donating? Not at all. Although the IRS has closed the loophole in the law, there is still a way to deduct full market value of your vehicle: If the charity uses the car itself to further its specific purpose.
For example, the nonprofit organization 1-800-Charity Cars refurbishes donated cars and provides them directly to the economically disadvantaged. Its goal is to help the needy and welfare-dependent to become stable, self-sufficient, tax-paying citizens.
"We've been going gangbusters," said CEO Brian Menzies. "We've given away cars for free to people in almost every state in the union, including Alaska and Hawaii."
In contrast to charities whose actual mission doesn't involve cars, Charity Cars has seen a 50-percent increase in donations this year. Because owners of higher-value used cars are now turning to his organization, Menzies says, "The quality of the cars has been phenomenal." Cars that aren't roadworthy are auctioned off to pay for repairing the cars that go to struggling families.
Note that the fair market value, in this case, must be determined by the donor. The government warns that, "The fair market value of the taxpayer's car may be substantially different from the 'Blue Book' value." Lower, that is. Edmunds' TMV Used Vehicle Appraiser provides an accurate valuation report of what a used car sells for in your specific neighborhood. This can be used at tax time and in the event of an audit.
Doing the math
So if you've got a car with a market value of $1,000 that you're looking to unload, you have four options.
1. Donate it to a standard charity that has 501(c)(3) tax-exempt status with the IRS. The letter you receive will state the amount it was sold for — far less than the market value. Say it's sold at auction for $250. There is a special rule that could apply if your car was sold for less than $500. If you get a written acknowledgement from the charity that meets the IRS requirements, you can claim a deduction of the fair market value or $500-whichever is less. We recommend you check out the IRS' donor information guide for more details.
2. Trade it in on a new car — never a great deal. Dealers are never excited to get people's old beater cars as trade-ins, although a late-model luxury or Japanese car might fetch a reasonable price. But dealers often use your trade-in to jiggle the terms of your new car purchase or lease, so you have to be pretty savvy not to get taken advantage of. (If you go this route, be sure to see Trading In Your Used Car first.) If you traded in that $1,000 car, you'd be lucky to get $700.
3. Donate it to an organization such as Charity Cars, which uses the car as part of its stated cause. This allows you to deduct the car using Edmunds.com's True Market ValueSM. Using the 33-percent tax bracket again, that means $1,000 x 33% = $330 in your pocket.
4. Sell it privately for around its full market value of $1,000. Though it's generally the harder road, this is what we recommend. The advent of Internet sites such as Autotrader and eBay Motors can make it much easier, though it depends if your car is in demand.
A word of caution: When it comes to tax deductions, there's more to it than your tax bracket. For example, you can't take advantage of a car donation at all unless you itemize your taxes. Other factors include your income, need for deductions, and the car's value. A certified accountant can help you decide if donating is in your best interest, or you can ask the IRS at (800) 829-1040.
So what did I do? Being the savvy Edmunds user, I knew I would be best served by selling it myself. Doing so was somewhat inconvenient and a bit strange. I literally became a "used car salesman" for a couple of weeks as I illustrated the car's features and benefits to total strangers.
In the end, though, I got $2,300 for the car, and I didn't have to worry about special IRS forms. I had sufficient money to reward my efforts and enough left over for the charity of my choice — far more than it would have received had I donated the car directly. Like so much else in life, the least convenient choice is often the most profitable.
