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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.