When Does Donating a Car Make Sense?

There are many worthy charities that rely on donations and, while perhaps not too few, there are people who donate to these charities. Some of these charities will accept automobiles as donations but how can such donations be made to the maximum benefit for both the giver and the charity?

Many people donate cars with the enticement of the charity’s “we’ll take your car running or not” policy. Making a car donation is easy when your sole purpose is to get rid of a car you don't want to deal with anymore. Pick up the phone, call the charity and they will haul the eyesore away. But does this truly help the charity? In terms of the extra work it makes for the charity, not necessarily.

For example, some charities accept the donation of cars with the purpose of donating those cars to people who need one. The problem is most cars donated aren’t in good enough shape to fulfill the stated objective of the charity. To quote CEO Brian Menzies of 1-800 Charity Cars, "If 5 percent go to our clients, I'm thrilled". Of the remaining donations, one-third goes directly to salvage. The remainder is auctioned off with the proceeds going to the charity of the donor’s choice. This process creates a great deal of work for the charity, sometimes with no direct value to them.

It Used to be Easier

Usually, people make the donation of a car for the same reason people make donations to any organization, the tax benefit. Before 2005, this was a simple and straightforward proposition. A person could donate a car and immediately take a deduction of the entire “fair market value” of the car on their taxes. Today that simply isn’t the case. Today, qualifying to deduct a vehicle's fair market value can only occur under certain conditions. The following two guidelines listed below are covered only in the most general way; you should still discuss these issues with your tax preparer before you donate.

Requirement 1 - You Must Itemize Your Return

In a word, If you want to claim fair market value for your car donation, you can’t do it if you are currently enjoying the facility of filing a 1040EZ tax return. You can itemize on a regular 1040 tax form, even if the donated auto is your only deduction. However, unless you have more donations than just the car, the amount you can deduct won’t beat the standard deduction already offered by the IRS.

Your tax savings are also tied to your tax bracket. In other words, a car donation with a value of $1000 equates to a $280 dollar tax savings for those in the 28% tax bracket and a net of 15% for those in the 15% bracket.

Requirement 2 - The Charity Must Qualify

Just because a charity is a non-profit organization, it may not qualify you for a deduction per IRS rules. For deductions, a charity must meet the guidelines of a “qualified” charity. To meet this requirement, the charity must be approved by the IRS as an "exempt-status" or 501(c)(3) organization. Most organizations will communicate this status in their advertising or receipts but if you’re not sure, ask.

Another Way to Use Your Car as a Donation

While it would mean a little more work for you, there is another way to make a “car donation” you could consider. To save the charity the extra work of disposing of your vehicle, why not sell it yourself and then make a cash donation to the charity? As complex as the IRS has made it to deduct the “fair market value” of a car, its rules concerning cash donations are pretty straightforward - deduct the amount of the gift. A little effort on your part will save the charity much legwork and will likely afford them with a greater net donation to enable them to do what they do instead of being in the car business.