Does Charity Car Donation Still Make Sense Under Tougher IRS Rules? Part 2

In contrast to charities whose actual mission doesn't involve cars, Charity Cars has seen a 50-percent increase in donations this year. Because owners of higher-value used cars are now turning to his organization, Menzies says, "The quality of the cars has been phenomenal." Cars that aren't roadworthy are auctioned off to pay for repairing the cars that go to struggling families.

Note that the fair market value, in this case, must be determined by the donor. The government warns that, "The fair market value of the taxpayer's car may be substantially different from the 'Blue Book' value." Lower, that is. Edmunds' TMV Used Vehicle Appraiser provides an accurate valuation report of what a used car sells for in your specific neighborhood. This can be used at tax time and in the event of an audit.

Doing the math So if you've got a car with a market value of $1,000 that you're looking to unload, you have four options.

1. Donate it to a standard charity that has 501(c)(3) tax-exempt status with the IRS. The letter you receive will state the amount it was sold for — far less than the market value. Say it's sold at auction for $250. There is a special rule that could apply if your car was sold for less than $500. If you get a written acknowledgement from the charity that meets the IRS requirements, you can claim a deduction of the fair market value or $500-whichever is less. We recommend you check out the IRS' donor information guide for more details.

2. Trade it in on a new car — never a great deal. Dealers are never excited to get people's old beater cars as trade-ins, although a late-model luxury or Japanese car might fetch a reasonable price. But dealers often use your trade-in to jiggle the terms of your new car purchase or lease, so you have to be pretty savvy not to get taken advantage of. (If you go this route, be sure to see Trading In Your Used Car first.) If you traded in that $1,000 car, you'd be lucky to get $700.

3. Donate it to an organization such as Charity Cars, which uses the car as part of its stated cause. This allows you to deduct the car using Edmunds.com's True Market Value^SM. Using the 33-percent tax bracket again, that means $1,000 x 33% = $330 in your pocket.

4. Sell it privately for around its full market value of $1,000. Though it's generally the harder road, this is what we recommend. The advent of Internet sites such as Autotrader and eBay Motors can make it much easier, though it depends if your car is in demand.

A word of caution: When it comes to tax deductions, there's more to it than your tax bracket. For example, you can't take advantage of a car donation at all unless you itemize your taxes. Other factors include your income, need for deductions, and the car's value. A certified accountant can help you decide if donating is in your best interest, or you can ask the IRS at (800) 829-1040.

So what did I do? Being the savvy Edmunds user, I knew I would be best served by selling it myself. Doing so was somewhat inconvenient and a bit strange. I literally became a "used car salesman" for a couple of weeks as I illustrated the car's features and benefits to total strangers.

In the end, though, I got $2,300 for the car, and I didn't have to worry about special IRS forms. I had sufficient money to reward my efforts and enough left over for the charity of my choice — far more than it would have received had I donated the car directly. Like so much else in life, the least convenient choice is often the most profitable.

Does Charity Car Donation Still Make Sense Under Tougher IRS Rules? Part 1

When my aging Nissan Sentra began to need several hundred dollars' worth of repairs every few months, I considered donating the once trusty blue sedan to charity. I knew of several pet charities that would be grateful. Besides, donating a car seemed so much easier than selling it. No fixing it up. No phone calls. No Tom, Dick and Harriet knocking at my door — or standing me up on a Sunday morning as I waited for Godot.

The biggest incentive, though, came from the tax deduction. At the time, the IRS was allowing donors to deduct the "fair market value" of the donated car from their taxes. So donating the Nissan, whose market value was about $2,400, meant $792 off my taxes (assuming a 33-percent tax bracket). Every year, more than a million Americans donated their cars just like this.

Too good to be true Unfortunately, whether through ignorance, confusion or greed, a substantial percentage of car donors have been deducting the full "suggested retail price" — what a dealer would get for reselling your trade-in — instead of the fair market value. That's far more than the IRS had intended, costing the government millions in lost tax revenue.

The charities weren't making much, either. Most of the donated cars were sold by the charities for a pittance at auction, and middlemen who administered the programs on behalf of the charities took a large percentage of those meager profits.

So in 2005, the IRS changed the rule. From then on, if your car is valued at more than $500, the deduction is limited to the charity's actual selling price. The donor must attach a statement of sale to the tax return in order to receive the deduction. (The charity is obligated to provide the statement within 30 days.) You are not entitled to know the deduction amount before donating your car.

That leaves most donors in the dark — and may leave some businesses and charities in the red.

Good for government = bad for business? Taron Reeves owns America's Car Donation Charities Center, one of many commercial fundraisers that give a percentage of profits to their charity members. Donations through Reeves' company went down 30-35 percent after the new law went into effect. What's worse, his overall profits have dropped a full 50 percent, as owners of "higher-value cars" — anything more than $2,000-$3,000 — stayed away in droves.

Since the average car that Car Donations Charities Center now receives for charity is valued at only $250-$300, Reeves has had to cut back on his overhead and expenses to maintain his non-profit business. A native Texan, Reeves says he now has to work a little smarter and a little faster than he used to; nevertheless, he remains undaunted.

"There are lots of cars out there," he said. "I look at one that's sitting in someone's yard, waiting to be donated and say, 'That's a $50 bill just flapping in the wind right there.'

"As long as we can accommodate the donor and not lose money for the charity, we'll do it."

As one door closes, another opens Since the biggest loss for consumers is for those who own higher-value used cars, should they give up hope of donating? Not at all. Although the IRS has closed the loophole in the law, there is still a way to deduct full market value of your vehicle: If the charity uses the car itself to further its specific purpose.

For example, the nonprofit organization 1-800-Charity Cars refurbishes donated cars and provides them directly to the economically disadvantaged. Its goal is to help the needy and welfare-dependent to become stable, self-sufficient, tax-paying citizens.

"We've been going gangbusters," said CEO Brian Menzies. "We've given away cars for free to people in almost every state in the union, including Alaska and Hawaii."

eHow Car Donation in the USA Video

Here's an interesting video the eHow put up on YouTube about Car Donation in the USA. Be sure to check it out!

Guide to Donating Your Car Part 3

8. Complete Your Paperwork

If your car is worth more than $500, you must complete IRS Form 8283 and attach it to your yearly taxes.
There are several exceptions which allow you to use the Kelley Blue Book or a NADA guide, but you must use the FMV, not simply the highest value listed for the year and make of your car. Use the FMV when:

• instead of selling the vehicle, the charity keeps and uses it,

• the charity makes improvements to the car before selling it,

• your car is sold at a discounted price to a person with a low income,

• or if the car is worth less than $500.

It is true that the biggest winner in the car donation game is usually the donor, and not the charity recipient. But if you take your time, ignore the quick and easy television appeals, and find a reputable, high-performing charity that will make the most of your donation, we can all emerge victorious.

9. Use Fair Market Value (FMV) for the Car

And remember to always get a receipt when you donate the car. Again, the IRS is watching this area very closely.

10. Take the Time to Get It Right

Guide to Donating Your Car Part 2

4. If You Have to Use a Intermediary Agency, Research the Percentage that Gets to Charity

The IRS does not require the car donation agencies to contribute a set amount of the auto's proceeds to the intended charities; that amount is negotiated between the charities and the handlers. Try to find an agency that maximizes that amount, and call the charity to confirm that number before you give. The charities are reluctant to criticize the middlemen, because they don't want to lose the dollars they do receive, but state attorney generals are beginning to investigate and even prosecute these for-profit middlemen, for holding themselves out as charities and misleading the public on the amount that is actually reaching charitable causes.
While many organizations can claim non-profit status, donations to 501 (c) (4) organizations are generally not tax-deductible. These are political organizations with permission to lobby our government; like Disabled American Veterans or the National Rifle Association. Make sure your intended recipient has 501 (c) (3) public charity status.
Some charities will ask you to leave the assignment of ownership space on the charity donation papers blank, so they don't have to re-title the auto. If your charity asks this of you, find another charity. If you don't formally sign your car over to the designated nonprofit, you will be held responsible for any parking tickets that are subsequently incurred, or liable if it's used in a crime. Remember, the charity you give the car to will probably not use your car to deliver meals to the needy, but will simply sell it as quickly as possible. When someone buys it from them at auction and doesn't bother to register that car, it's still yours in the eyes of the law.

5. Make Sure Your Intended Organization is a 501 (c) (3)

6. Transfer the Car Correctly to the Charity

7. Value Your Car Correctly

Due to the proliferation of car donations, the IRS became increasingly concerned about how taxpayers valued the vehicles they donated to charity. Over the last few years, the agency stepped up their audits in this area and began to advocate for changes to the laws that govern such deductions. With the passage of the American Jobs Creation Act of 2004, those changes have come. Starting with your 2005 tax return, you will no longer be able to deduct the published fair market value of vehicles worth more than $500. Under the new rules, your deduction will be determined once your car is sold and the charity sends you a receipt indicating the exact amount your car garnered at auction.

Guide to Donating Your Car Part 1

 In the past few years, however, more and more donors are attempting to help themselves, and help others, by donating their used automobiles to charity. This has become a massive business. In the year 2000, nearly ¾'s of a million people took a car donation deduction on their federal tax returns, thusly lowering their taxes by over $650 million.

As America's car donation system is currently construed, it is easy for donors to benefit greatly by donating their cars, albeit with a little risk. By following these 10 Charity Navigator Tips For Charitable Auto Donations, you can minimize that risk, and maximize the amount that actually gets to charity.

1. Find a Charity That Directly Accepts Car Donations

If at all possible, avoid the for-profit intermediary organizations that advertise so pervasively to handle your car donations. When you work with one of these organizations, they keep the vast majority of the dollars created from your donation. Even the most reputable of the agencies that handle these transactions keep nearly 50% of the car's value for their troubles (other, less scrupulous entities keep 90%, or even more). If you can find a charity that handles the transaction themselves, they can keep 100% of their profits. It's possible that the charities you already support have a car-donation program that you don't know about. Check with them first.
Remember that you're still making a charitable donation, and don't simply give your automobile away to any charity, just because they're a charity. Do a little research, and find a high-performing charity that does the kind of work you like, in the region you wish to target, and does that work well.
Worthy charities are going to have to pay someone else to handle a pick-up or a tow. This is yet another cost that cuts into the amount that gets to that organization's programs. If you can get the car to them yourself, do it.

2. If Your Charity Doesn't Accept Cars, Take the Time to Find a Charity That Does, and Still Does Work You Respect

3. If It Runs, Drive the Car to the Charity

Helpful Link of the Week #10

For our special 10th edition of "Helpful Link of the Week" we're putting out a very valuable source that you should really check out if you're looking for more information about donating your car.

Better Business Bureau - Car Donations

This first link is from the BBB and deals with everything about Car Donation. Make sure to check out this valuable source!

GHF

Hey guys, go and check out Global Heritage Fund, they have a great program for donating your car!

The Tax Benefits of Donating a Car: Part 3

Other donation rules still apply

Of course, the general tax laws regarding all charitable gifts still apply to automotive gifts.

First, the timing of your donation is critical. All charitable gifts must be made in the tax year for which you are filing the return. To claim a donated auto on your current tax return, you must have given the vehicle to a charity by Dec. 31 of the tax year for which it is claimed.

Be sure to check out the charity before dropping off your auto. Thousands of philanthropic groups accept gifts of vehicles. The important thing is to make sure that the one you select is a reputable and tax-qualified organization. Unfortunately, some con artists take advantage of people's good intentions and accept cars that never go to philanthropic causes.

Other groups may well do valuable community work, but they are not approved charitable organizations under IRS rules. Ask for copies of the group's federal tax-exempt status documents. You also can check out the IRS' website directory to see if the charity is on the approved list or peruse GuideStar's registry at GuideStar.org, which provides information on millions of U.S. nonprofit organizations. Finally, you can call the IRS at (800) 829-1040 and ask about the group's tax status.

Charitable gifts require itemization

Next, to write off your auto gift, you must itemize instead of claiming the standard deduction. That means you have to keep track of what you give and file the long Form 1040 and Schedule A on which you list itemized deductions.

If your old car is the only deduction you can claim on Schedule A, giving it to a charity may not be worth it from a tax standpoint. But if your itemized expenses are close to your standard deduction amount, adding the value of a donated car could be just what you need to make itemizing the right tax choice this year.

Also keep in mind that as a tax deduction, the value of your car does not directly cut your tax bill. Deductions are used to reduce your taxable income, which usually does mean you'll owe less taxes. But a deduction's actual worth depends on your tax bracket. That means a donation of a $300 auto translates to a tax cut of only $75 for a filer in the 25 percent tax range.

So if you would rather have the cash instead of a comparatively small tax break, sell your old auto. If, on the other hand, you're feeling generous -- or don't want to spend what it would take to get the clunker in sellable shape -- giving it to a charity might be the better route.

Helpful Link of the Week #9

This week's link is from KOA Camps. They can take a car off your hands, as well as boats, RVs, trucks, and even busses, for no charge (you even make a profit from the tax break) anywhere in the US!

KOA - Donate your Vehicle

The Tax Benefits of Donating a Car: Part 2

Intervening-use exception

The vehicle donation law, however, does provide a few exceptions that will allow a giver to claim the auto's fair market value.

Say you donated your $1,000 station wagon to a food bank. Instead of immediately selling it, the group used the auto for several months to deliver meals and other food items to needy families. Eventually, the organization decided to sell the vehicle for $800. In this case, you could still claim the full $1,000 fair market value of the auto as long as you received documentation from the food bank on not only the sales price, but also how the auto was used for nonprofit works before the sale. Under the IRS regulations, this is classified as "significant intervening use" of the vehicle that allows the taxpayer to claim the higher deduction.

Other examples of IRS-accepted intervening use are a donated auto used by a charity to transport clients to doctor appointments or a car given to a vocational school that used it in its automotive repair classes.

The IRS says a donor also can claim a fair market value deduction if the charity makes a material improvement to the vehicle. This, according to the tax agency, means major repairs that significantly increase the auto's value. Material improvements do not include finish work (such as painting, waxing or rust proofing), dent or scratch removal, installation of theft-deterrent devices, or the cleaning or repair of upholstery.

Break for bargain-basement sales

What if the charity immediately sells your donated station wagon, but for a mere $300?

Scharin says don't shortchange yourself. Under the new auto-donation rules, you might be able to claim a $500 deduction even though the charity sold your auto for $200 less.

The IRS says this larger deduction allowance is OK in cases where a charity sells a donated vehicle at a price significantly below market value, or even gives it away to a needy person, as long as it's done to further the charity's mission of helping a poor person who needs transportation.

Be careful here. Make sure the vehicle did indeed go to a needy individual. Shortly after the vehicle donation rules changed, the IRS discovered that some charities sold autos at auction but reported that the sales -- at prices well below market value -- were to disadvantaged buyers, to trigger the exception that allows the donor a higher deduction amount. If the IRS discovers such false reporting, it could totally disallow your donation and deduction.

Also keep in mind that regardless of how a charity disposes of your donated vehicle, your deduction cannot exceed the value of your donation. So if you donate a clunker worth $150, says Scharin, that is the amount you can deduct even if the charity gives the auto away.