In the past the process of getting rid of a used vehicle that you didn’t want to bother selling was pretty simple. Just find a charity to accept the vehicle as a donation and take a tax deduction the fair value of the vehicle. It seemed like a win-win. The charity sells the vehicle and uses the funds for its operations, and you get a tax write off with little hassle.
Photo by dave 7 via Flickr
That all changed with a new IRS rule that went into effect in 2005. Suddenly any vehicle worth more than $500 couldn’t have some arbitrary value associated with it. The actual sold value had to be documented. This was to close a loophole where people were giving their vehicles higher values than they were really worth.
This new rule made donating your vehicle a big hassle. Should you ever donate your car to your favorite charity?
Here are three major concerns of donating your vehicle to charity.
If your car is worth more than $500, you can’t just write an arbitrary number down for the value of the vehicle. You have to wait until the vehicle is sold to know what value you can deduct as a donation. Almost all charities that accept vehicles sell them off for cash immediately, so it shouldn’t take too long, but you still don’t have a solid number when you hand over the keys.
An even bigger problem comes when the charity sells the vehicle. The last time I checked there wasn’t a non-profit that was also a dealership. The organization that receives your donated car probably doesn’t have the expertise to get the largest check from a buyer. (If I had to guess, most of these non-profits partner with a local dealership that agrees to buy the vehicle at a certain amount below the NADA or Blue Book value from them.) So while you might get some value, someone else is profiting off of the deal.
The worst part of donating your car is that at most you are only getting a percentage of the actual value of the vehicle as the donation. That percentage is whatever your tax rate is. Even if the charity gets fair market value for the car, you only get a tax write off of that donation amount rather than the full amount.
For example, let’s assume you donate a $2,000 vehicle, you’re in the 30% tax bracket, and the non-profit gets the maximum value for the vehicle. Your tax write off of $2,000 is only worth $600. If you had sold the vehicle for less than market value — $1,500 would be a good deal — you would be ahead by $900 over donating.
From a purely financial perspective, there are only a few instances where donating your car is a smart move.
If your donated vehicle is worth less than $500 you can assign an arbitrary fair value to it. At the end of the day you aren’t really get much of a tax write off anyways, and it is a fast way of getting rid of a junker sitting in your driveway.
If you don’t want to deal with the hassles of selling the vehicle yourself: maybe it doesn’t run, maybe you don’t want to deal with tire kickers, or maybe you’re just uncomfortable with the selling process, then donating it is a fast and easy way of getting rid of the car.
The one time that it can make financial sense is if the donated vehicle isn’t sold for cash by the charity, but is used for charitable use. If that is the case you are allowed to deduct the value of the car based on Blue Book or similar valuation methods.