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.