Automobile donation – the practice of giving away unwanted automobiles to registered charities for a tax exemption – has become tremendously popular over the last decade. Despite recent regulatory changes by the IRS, car donation remains a worthy tax shelter that provides a hassle-free alternative to reselling or trading in unwanted vehicles. Despite the many benefits of charity car donation, potential donors should be aware of the regulatory requirements for claiming a car donation tax deduction and also the limitations for how much of their donations are likely to be used directly on the needy.
Why Donate your Car?
There are several reasons why people choose to donate their cars. The first and most obvious reason is the joy of giving – car donation charities typically refurbish junk car donations and either give them away to needy people or sell them at a drastically reduced price. Some charities use the cars directly in their operation, while others simply resell the cars at market price and use the proceeds to help their target audience.
Secondly, charity car donation is typically the easiest way to get rid of an old vehicle. Alternatively, you could trade your car in on a new vehicle; however, you will likely get far below market value on your trade-in. A far more lucrative alternative could be to sell the car yourself, but the process can be time consuming and many people are simply not skilled salespeople.
Finally, Americans (and Canadians) donate their cars to receive the tax deductions, which function as a quick tax shelter for your clunker. Car donation tax deductions in America hit a peak of $2.4 billion in 2004 and still amount to hundred of millions in slower years.
Is Car Donation an Effective Tax Shelter?
Car donation provided an attractive tax haven up to 2005, when the IRS allowed donors to deduct the fair market value of the car from income taxes. Many sellers abused this generosity by claiming their car at the marked-up dealer resale price rather than fair market value, costing the government millions in tax revenue. Thus, in 2005, the IRS changed the rules for claiming car donations: claims for cars valued more than $500 are limited to the actual price that the car sold for in the charity auction. Donors must attach a statement of sale to tax deductions and are not entitled to know the deduction amount before donating their cars.
Despite the new restriction, it is still possible to deduct the full market value of a vehicle, provided the charity uses the car in its daily operations rather than selling it.
How to Donate a Car
You can claim a tax exemption by donating your car to any charity that has 501(c)(3) tax-exempt status with the IRS. Charities with this status are exempt from federal income tax and are eligible to receive state tax exemptions. Most importantly, such organizations are eligible to receive tax-deductible charitable contributions, attracting a large number of individual and corporate donors.
The target charity does not have to be car-oriented, though it makes more sense to donate to a charity with the facilities to handle incoming autos. Some charities contract the refurbishing and resale of autos to car dealers, paying a fee for service rendered.
Remember, you must obtain a statement of sale from the charity to file a tax claim!
Pitfalls of Car Donation
Donating your car to charity can have significant drawbacks when compared to other methods. Income-wise, you will generally get a lower payout on donating your auto than you would from selling the car independently or even trading it in on a newer purchase. Since charities by definition re-sell to the neediest members of society, they are not chasing premium prices.
Of course, you may not care about how much money you get and are far more interested in helping the less fortunate. However in that respect you may also not be getting much bang for your buck: much of the revenue earned by charities through car sales goes into the repair and transport of the old vehicles, which are sometimes in such bad shape that the parts from multiple cars need to be combined to create one salable vehicle. Other charities subcontract the actual movement and sale of vehicles to private dealerships for a fee, and depending on those fees there may be little left to donate.
For example, The Record (Hackensack, New Jersey) ran a story by Harvey Lipman detailing the plight of the American children’s society. This registered charity resells some of its cars to regular customers, using the proceeds to help the families of sick children. Other cars are resold to these families at a low price or simply given away. The Society operates out of a used car dealership and relies on satellite dealers for logistics. Barely 25% of the ACS’s $2.9 million operating budget actually went towards its target clients – the rest went to used car dealers for advertising ($1.5 million), insurance, government fees, towing, repairs and other expenses. In some cases, cars were resold to other used car dealers, who in turn sold those cars at highly marked up prices – a perfectly legal move but one which might not sit well with people who want to see their old cars put to charitable use.
More Information
For more information on the 501(c)(3) tax-exemption status, please visit the IRS website.
Popular Car Charities in the USA:
- Car Angel – “Car Angel originated in 2000 as the New Millennium Scholarship Fund. In 2001, when we started accepting vehicle donations to aid our cause, our name was simplified to Angel Ministries. Our cause now includes funding several of our own projects, including prison outreach/rehabilitation, children’s moral DVD outreach, worldwide leadership training, and child support for children in third world countries.”
- Helping Hands of America – “Helping Hands of America personnel have been in the carmobile business over 20 years and know how to get the most money for your donation. The more we sell your car for, the more the charity receives and the bigger your tax deduction from the donation of your car… Your donation is 100% tax deductible.”
Popular Car Charities in Canada:
- Charitycar.ca – “As a charitable contribution your vehicle can make a big difference in the life of someone less fortunate in your community. We take any used car, truck or van, provide free pick-up and let you choose which charity you would like to donate to: a school, church, shelter or non-profit organization and you will receive a tax donation.”
- The Kidney Foundation of Canada – “Kidney patients benefit from your generous donation. Close to 2 million Canadians have kidney disease or are at risk. Your car donation will help in the fight against kidney disease. Also, it is an easy, hassle free way of disposing your vehicle. We will take care of coordinating the pick of your vehicle and its disposal, whether it is recycled or auctioned.”
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