It’s hard to read the paper or listen to radio and not hear ads for charitable vehicle donation.  But regardless of their claims, it takes some effort on your part to donate a car for tax deduction purposes and to benefit everyone involved also.  Benefiting everyone is what is supposed to happen, but in practice, agents that handle car donations for charity (and buy those money making ads) can come out far better than everyone else in a vehicle donation transaction.

Getting your charity of choice the best deal when you donate a car for tax deduction purposes will also increase the amount you’re able to subtract from your own income when figuring your federal taxes.  It is to your advantage to find a charity that can use your vehicle directly, rather than selling it off.  Even if they donate it to an individual or family in need, you are allowed to deduct the fair market value of your car, which is the price they would have paid if you’d sold it to them directly.

There was a loophole in the 1990’s and early 2000s that caused third-party, for-profit agents to skim as much as 70% from each vehicle transaction at auction, when vehicles were turned over for auction by charities.  The reliance upon wholesale auctions was further complicated by the for-profit reliance of such companies upon economies of scale.  Without volunteer labor at charities, it cost too much to take time finding a retail sale.  So, a vast majority of cars donated for a tax deduction benefit were sent to the wholesale auction market.

This practice was noticed by the US General Accounting Office (GAO).  This meant that there was a large discrepancy between the amounts claimed as “fair market value.”  Nearly $700 million in discrepancies were noted in 2000, for instance.  Since 2005, for those who’ve donate cars, tax deductions have been seriously limited and include additional filing requirements.

The fair market value continues to be the price at which you can expect to sell your car in a person-to-person transaction and without any pressure to complete the transaction on either end.  Such a retail sale may be an order of magnitude higher than what would be paid at wholesale auction.  In the case of a donated car, tax deductions may not even be worthwhile unless the return on your donation is increased by considering its ultimate fate.

You don’t want to see your $4,000 sedan that you have spent so much time using be sold for $50 at auction, tossed on the back of a truck and shipped to a far-off state for dismantling.  Wouldn’t you prefer your car continued to live on with someone else?  It’s hard to get rid of a car, but at least when you donate a car, tax deductions and the intangible good feeling of donating to someone less fortunate can ease your car-guilt.

Aside from being environmentally unfriendly when long haul transport is considered, there is the matter of a very small sale price.  According to the new guidelines, when you donate a car, the tax deduction is limited to the amount it is sold for, if the car is sold during the first two years after you donate it to the charity.  After you decide to donate a car, tax deduction considerations behoove you to do a little calling around and find a local non-profit organization that can actually use your car as part of it’s IRS-approved, charitable mission.

You will find that very few charities conduct their own car sales.  However, educational operations often sell a well-refurbished vehicle at charity auctions.  Such sales often command a price even higher than fair-market value, though you are limited by the extent of your donation rather than what they did to fix it up.  Donated cars for tax deduction benefits are certainly not the most lucrative beak on one’s tax burden (credits are usually worth about 3 times as much), but they can be very useful.  Get the most out of your vehicle donation and help some needy people as well.

This entry was posted on Friday, May 8th, 2009 at 1:38 am and is filed under Vehicle Donation Advice. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.