Beware When Donating Cars to Charity

Year-end 2011 is rapidly approaching. For thousands of Americans that means, among other things, year-end tax planning. During this time of the year it is not uncommon for qualified non-profit organizations to ask people to consider donating their used vehicle and receive an income tax deduction.
Well meaning donors may find their deduction to be considerably less than the fair-market value (FMV) of their vehicle. If the claimed value of the vehicle exceeds $500 and the vehicle is sold by the charitable organization, the taxpayer’s deduction is limited to the amount of money the charitable organization received from selling the vehicle.
The charitable organization must provide the donor with an acknowledgement within 30 days of the sale, stating the amount of gross proceeds they received. For example you donate a car to charity having a FMV of $5,000. If the charity takes the vehicle and sells it for $2,500 then your deduction will generally be limited to $2,500.
Because charities often sell vehicles at auctions or in bulk sales, this example is not uncommon. There are exceptions to virtually every rule, and this includes the deductible amount for donated cars. There are exceptions which allow you to use the FMV when claiming your income tax deduction.
Use the FMV when…
• instead of selling the vehicle, the charity keeps and uses it,
• the charity makes improvements to the vehicle before selling it,
• your vehicle is sold at a discounted price to a person with low income,
• or, if the vehicle is worth less than $500. You must try to determine the actual FMV for your particular vehicle, and not just use the highest value listed for the year, make, and model of your vehicle. Remember, the IRS is paying close attention to this area.
Finally, when you choose to donate a vehicle to a qualifying non-profit organization, you generally want as much money as possible to go to the organization itself. You should check with the desired organization and find out if they accept donations of vehicles. Beware using “middlemen” when donating a vehicle.
These are companies who sell the vehicle and give money to your selected charity. Often, these middlemen keep 50 – 90% of the sales proceeds for themselves, meaning your charity might receive as little as 10% of the proceeds.
Avoid middlemen. Numerous for-profit intermediary organizations advertise aggressively on TV, billboards and elsewhere, offering to help you donate your vehicle to charity. Here’s the catch: These organizations typically keep about 50 percent to 90 percent of the vehicle’s value for themselves, and the charities don’t get what they could have gotten.
To prevent this, check directly with charities you admire and find out whether they accept car or boat donations. For more information on this subject, please consult IRS Publication 526 – Charitable Deductions, IRS Publication 561 – Determining the Value of Donated Property, or consult with your tax advisor.