By Aaron Lerma, CPA
February 10, 2016
If you’re thinking of donating your car to charity, consider the following:
The organization that receives your car doesn’t usually want it; they want cash. When they receive your car, they sell it quickly. A quick sale generally means a bargain sale. This reduces your charitable deduction. Under current tax law, your deduction is limited to the sales proceeds the organization receives when they sell your car.
How do get a bigger deduction?
There’s a better way to get rid of your old car and get a bigger deduction. Sell your car yourself and then donate the sales proceeds. Your deduction is equal to the amount of cash you donated. This often requires more effort on your part, since you may have to fix up your car, list it somewhere (e.g. Craigslist), etc. It may be worth it, (especially if you turn it into a family project) since you are likely to receive a better price under this option, and therefore a bigger deduction.
One of our clients recently donated a car to charity. The organization subsequently sold the car at an auction for $575. Kelley Blue Book valued the car at around $1,900. And the new buyer likely resold the car, without doing anything to it, for $1,900. But the sale for $575 meant our client could only deduct $575. Had he sold the car for $1,900 and then donated the cash, he could have deducted $1,900. If you were in the 15% tax bracket, the difference in deduction between $1,900 and $575 would make you pay $200 more tax. If you were in the 39.6% bracket, you would have to pay $525 more tax.
If you simply donate your car, the winners are the IRS (they get more tax) and the car auction dealer (they get a good deal on the purchase). The losers are you (you get less deduction) and the charitable organization (they get less donation). The only true benefit for you, the donor, is that you got rid of your old vehicle with little time and hassle.
If you donate other types of property, most of the time you can deduct their full fair market value. A bargain sale in the situation described above does not establish the car’s fair market value. Prior to 2005, you could deduct the fair market value of your donated vehicle (including cars, boats, and planes). In 2004, Congress passed the American Jobs Creation Act, which caused your deduction to be based on what the charitable organization did with your vehicle. If they sold it, your deduction was limited to the sales proceeds.
The IRS’s reporting requirements are also higher for donated vehicles (including cars, boats, and planes). Charities must file a Form 1098-C with the IRS (for vehicles with a value of $500 or more). The 1098-C reports the year, make, and model of the vehicle, the gross proceeds from the sale, and the date of sale. In addition, the charity must send you (within 30 days of the sale) a “contemporaneous written acknowledgement” which contains the same information as the 1098-C. This could put your charity under some unintended stress. In contrast, if the charity receives a cash donation (more than $250), the charity simply sends you a written acknowledgement stating the amount donated and whether goods or services were received in exchange for the donation. They are familiar with this procedure, since they already receive cash donations.
While donating your car to charity is often nice and easy, it probably won’t give you the biggest tax deduction. Nor does it give your charity as much value as you might think. Consider the alternative: you sell your car, and donate the cash. You pay less tax, and the charity receives more money. It is almost always a win-win.