Joe bought a new pickup truck, but the dealer wouldn’t give him what he thought was fair trade-in value for his old rig. The amount they offered amounted to “giving the truck away.”
Recalling a radio commercial he’d heard, Joe looked up a local organization that takes donated vehicles and provides a tax write-off for the donation.
He called them, they worked out a “fair market value” that pleased Joe, the organization picked up the truck and title, and everybody was happy.
The following year, though, Joe got a letter from the IRS.
That’s seldom a good omen.
When the smoke cleared, Joe discovered the allowable tax deduction for donated vehicles largely depends on what the recipient DOES with the vehicle, and Joe’s truck had been auctioned at a price significantly below the fair market value Joe declared.
In the end, he received a little less money for his truck than the auto dealership offered and had to pay back several thousand dollars to the feds.
How to Make Sure Your Vehicle Donation is a Good Decision
First off, I’m not a tax attorney, an accountant, or the son of an accountant. The advice I’m providing here is from experience and is based on my interpretation of the current IRS regulations. Before deciding how to handle the donation of your vehicle, you may want to get professional advice.
Joe’s mistake, he later discovered, wasn’t that he decided to donate his truck instead of handing it over to the dealer for a song.
The real problem was that Joe listened to a radio commercial, got the jingle stuck in his head, and figured vehicle donation would be treated the same way by the IRS.
That’s not so.
Fundamentals of Car Donation
You’ve undoubtedly seen or heard ads by charities that can turn your unwanted car, truck, or boat into a welcome gift of cash to the organization.
Prior to a 2005 change in the tax code, you received the “fair market value” write off for your vehicle, regardless of what the charity did with your gift.
That’s the price a reasonable person would gladly pay for a vehicle like yours and in the same condition of yours.
Most nonprofits don’t have a car lot. They auction off the vehicles donated to them and receive the proceeds from that auction, minus expenses.
That means your car could be worth $5K, but sell at auction for $2K. That’s why dealers like to go to car auctions. Like Joe found out, though, the IRS doesn’t base your deduction on what your car is “worth” now; they will allow only the amount it actually sells for.
Here’s an excerpt from IRS Publication 4303:
The amount you may deduct for a vehicle contribution depends upon what the charity does with the vehicle as reported in the written acknowledgment you receive from the charity. Charities typically sell the vehicles that are donated to them. If the charity sells the vehicle, generally your deduction is limited to the gross proceeds from the sale.
Notice, the IRS says your donation is “generally” limited, so be sure to read a current version of the publication for yourself to see if there are exceptions that would benefit you.
Following are some of the tax-related issues you should know about. Again, though, always verify the info and get professional advice as needed. These are my own take-aways, and I’m just a guy who hates to waste money.
- Make sure the organization you choose is registered and approved as a qualifying institution. Here’s where to go for that information: IRS Non Profits.
- Note that your deductible expenses can’t amount to more than 50% of your gross income.
- Always get a written acknowledgement from the agency you donate to. You’ll need both a statement that the vehicle was received and a statement concerning the disposition of the vehicle.
- If you accept a gift in return for your donation (a vacation package, for instance), the price of that gift will be deducted from the value of the donation.
The bottom line: there are a number of factors that contribute to how much financial value you’ll receive from your vehicle donation. Certainly, the ability to help fund a worthy cause is the best thing about vehicle donations. If you can do that, though, and still get significant tax benefits for yourself… why not get the most?
How NOT to Make the Same Mistake
Since your tax deduction is limited to how much your donation sells for, you’re going to get the lowest value if you give it to an organization that depends on auctions.
How do you know what will happen with your donated property?
If you live in the Eastern United States, for instance, the Vehicles for Change organization finds families in need of reliable transportation and helps them get back (off) their feet.
A really cool thing about their model is that they also teach folks how to repair and detail vehicles. So they not only turn out cars and trucks that are clean and in good working order, but they prepare people with job skills in the process.
If you’re out west, look around for a similar organization. Find a charity that will put your car to good use instead of selling it at auction.
One more thing: no matter which route you choose to go, always look the charity you’re considering up via a watchdog tool like Charity Navigator. That allows you to find out how much of your donation actually goes to the people who need it.
Vehicle Donations – Here’s How to Get Maximum Tax Value – Wrapping it Up
It’s a pretty simple situation, really. The IRS closed the loophole for car donations. If you want maximum benefit for that car, truck, or boat you no longer need… then make sure it provides maximum benefit to the charity of your choice.
If you want to help the car lot, then take the lowball price they offer or give it to an organization that sells donated goods at auction.