A lot of people are now thinking of donating their old car to charity because they will be able to make a tax deduction as a result. While this is presented as a quick and easy way to do it, the reality is that you do have to know what you are doing first. Americans are getting rid of their unwanted vehicles by the thousands, in part because it means they don’t have to go through the difficulties of junking or selling it. Plus, when people donate a car, it means that they can do something good for the community, while being rewarded with a lower tax burden.
However, things are a little bit more complex than that. For instance, it appears that only a small percentage of the proceeds generated when selling the donated vehicles actually go the charity. Not just that, people sometimes make serious mistakes with their tax deduction, which can cause even bigger problems. Put together, making a car donation is sometimes one of the most cost ineffective ways to help a charity.
There are many potential problems with regards to a car donation, most of which centers around misrepresentation and all-out fraud. In various states, Attorney Generals have investigated charities for dealing in false advertising. Often, the organizations aren’t charities at all but third party, for-profit businesses that act as a middlemen. Some of them give as little as 5% of the proceeds to the charity that donors believed they were supporting.
Consider, for instance, Kars4Kids, which is one of the best known car donation organizations in the country. According to their website, they have now received almost half a million vehicles. However, CharityWatch, an independent watchdog, has given them a D rating, which is very low. This is because less than 50% of the money actually goes to the charities and they do not properly disclose that any money they do distribute is spent solely on Jewish children, almost exclusively in New Jersey and New York.
There is a clear lack of transparency in the world of vehicle donations. Sometimes, they are completely misleading, and this is why you need to be careful if you want to donate a car. Of course, this does not mean that you shouldn’t donate a car at all. Kars4Kids, for instance, has responded to the D rating they received by explaining that they have very high costs in relation to the in-house processing of donations. They also stated that a far greater percentage is sent directly to charitable work than what other third party organizations do. Furthermore, they explained that their website makes it very clear who is supported through their work and that they are therefore wholly transparent. Indeed, experts do not say that donations should not be made to Kars4Kids or to other such organizations, but rather that people need to exert due diligence at all times.
If you only want to donate a car to charity because you want to get rid of it, and not because of the tax deduction, then you may feel that it doesn’t matter to whom the proceeds go to anyway. However, if you do care about the charitable donation, then you may want to consider selling your car and giving that money directly to charity, which is tax deductible. On the other hand, that takes away one of the greatest advantages of donating in the first place, which is that you avoid the hassle of selling.
If you have a valuable vehicle and the associated tax deduction is very important, then you must make sure that you are properly protected. After all, you don’t want to come to the attention of an IRS auditor and find that you have done things wrong. Thankfully, now that the scary part is out of the way, you will be happy to know that you can make sure you make your donations properly by following these 8 steps.
8 Steps to Follow Before You Donate a Car:
1. Investigate the charity that you have chosen. It should have 501(c)3 status with the IRS. If there is no such registration, it is not classified as a charity. This means that you won’t be able deduct your donation from your taxable income either.
2. Make sure that the charity is efficient. CharityWatch and Charity Navigator are two independent watchdog organizations that monitor the efficiency rating of charities, which means they look at how much money is actually spent on service users.
3. Itemize your tax return if you want to deduct your donation. The IRS has some stringent rules in terms of how much can be deducted each year, and what amount you can deduct as a result of your donation. Usually, what you can deduct is the sale price of the vehicle, which may not be the fair market value. Only if the charity uses the vehicle, has made material improvements on it, or donates/sells it to a needy person will you be able to deduct the fair market value.
4. Make sure you get a tax receipt. They should send you a receipt showing that they have taken possession of the vehicle. It should also indicate the selling price of the car. This should be with you within 30 days of the sale taking place, which is enforced by law.
5. Complete IRS Form 8283. For vehicles that sold for $500 or more, you will need to complete Section A and attach it to your tax return. If the value is over $5,000, then you will need an independent appraisal to confirm this and you must complete Section B.
6. Try to drop the vehicle off yourself. A lot of charities will come and get your car, but it would be better to do it yourself as you help them save on towing costs and fuel. In so doing, you make the charity more efficient, while at the same time giving you the opportunity to confirm where it is going to. If it must be picked up, sign over the title deeds and get a photocopy so that you are no longer liable for the vehicle.
7. Take lots of pictures of your vehicle, save any repair and maintenance receipts, and so on. This is particularly important if you want to claim a tax deduction.
8. Check out IRS Publication 4303 for further information.