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On the radio, the advertisements are constant. Whether a small local organization or the American Red Cross, charities keep asking us to donate our old cars. The advertisements claim that from your donation of an old car — even a car that no longer runs — the charities receive a valuable donation and you will receive a nice tax deduction. However, as the past-president of a community foundation, I would advise any prospective donor against such a gift.
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Congressional investigators released a blistering account of charity vehicle donation programs Friday, asserting that although the programs cost the government hundreds of millions of dollars in tax revenue each year, comparatively little money ends up in charity coffers.
Los Angeles Times, 13 December 2003
More than 11 years after the Los Angeles Times article linked above was published, another Los Angeles Times columnist described how a car donated through Cars 4 Causes generated a $700 charitable deduction for the donor but yielded only $25 for his chosen charity. (Under current IRS regulations, my analysis indicates that $700 deduction might trigger an IRS audit with some of the deduction disallowed.)
2 March 2015
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The California Attorney General reports that — on average — charities realize less than 33% of the proceeds when a donated car is sold. The broker handling the sale receives more than 67%. I certainly do not think this represents a good donation to a charity.
As for the tax deduction, remember the amount of a donation is deducted from your income before computing the tax, not from the tax itself. The IRS limits the deduction for a non-cash donation to the "fair market value" of the item and gives some guidelines regarding how that value is determined. The key guideline — found in IRS Publication 561: Determining the Value of Donated Property — says:
In general, both the donor and the charity benefit if the donor sells the car (even at a quick-sale price) and donates the net cash to the charity. In this case, since the car is worth less than what the donor paid for it, the donor pays no taxes on the money received from the sale. In the meantime, the charity receives the full donation, not merely 20% of the donation.
As an example, consider a 2010 Toyota Camry SE sedan with 40,000 miles, a full array of accessories, in moderately good condition. According to the Kelly Blue Book, a dealer might offer $13,042 for this as a trade-in and yield $14,568 in a private-party sale. Assume that the charity's broker takes "only" 75% if you donate the car and that selling it yourself costs $100 in advertising. For a quick sale, assume the broker prices the car at its trade-in value. However, since a consumer could not generally buy this car at that price, you ask for a quick private-party sale at trade-in plus one-third of the difference between trade-in and private-party prices. Finally, assume that you are in the 25% federal income tax bracket and the 4% state income tax bracket. (The values presented here are from 2014.)
|Car Donated to Charity||Car Sold and Cash Donated|
|cost of sale||$0||$100|
|net to charity||$3,260||$13,959|
Thus, in exchange for your effort of selling your car yourself, your chosen charity receives a donation more than $10,000 greater than if you had donated the car; and you receive an increased tax benefit of $300 greater than you could get by donating the car. Furthermore, you reduce the likelihood of an IRS audit.
This analysis does not apply if you donate something worth more than it cost you (e.g.: stocks, real estate, fine art, collectibles). In general, the commissions on selling these items may range from 5% to 10% (not as much as 80%). Further, if you sold such an item and donated the cash, you would have to pay income taxes on the gain, either capital gains taxes or even ordinary income taxes. If you donate the item instead of selling it, you pay no taxes on the increase in value but you get to itemize the current fair market value as a charitable donation.
As an example, consider a rare stamp that you bought at an auction for $1,000 several years ago. The stamp is now worth $25,000. At stamp auctions both the buyer and seller pay 10% commissions. Still assume that you are in the 25% federal income tax bracket and the 4% state income tax bracket (although with an expensive taste in stamps, you are likely in a higher bracket). Also assume a federal capital gains tax rate of 15% and a state rate of 2%. Note that, in this case, the original cost of the item (including commissions) becomes relevant.
|Stamp Donated to Charity||Stamp Sold and Cash Donated|
|original net cost||$1,100||$1,100|
|net sale price, amount to charity||$22,500||$22,500|
|tax benefit of donation||$7,250||$6,525|
|capital gains tax||$0||$3,638|
|net tax benefit||$7,250||$3,612|
Note that the fair market value is based on the "hammer price" of the stamp at auction, before the seller's commission is subtracted; that commission is a cost to the charity, not to you. This is greater than the net sale price you would receive if you sold the stamp. Also note that there really is no difference to the charity. If this had been stock and the charity had a very large investment portfolio, a commission might be negotiated lower than you pay, making the donation of the item a better deal for the charity than the donation of cash after the sale of stock. The capital gains taxes on the difference between net sales price and net cost consumes over half the tax benefit of the donation.
The conclusions are:
NOTE: The first conclusion does not apply when a donated item will actually be used by the charitable organization. For example, a donated car would be very much appreciated by an agency that provides transportation to low-income persons so they can commute to and from work or by an organization that teaches welfare recipients how to be auto mechanics. Since these recipients would keep the car and not immediately sell, it they get full value of the donation; and the donor would get the Kelly Blue Book value as an itemized deduction. (Using the principle that no one pays as much as retail on a private-party purchase of a used car and no one receives as little as wholesale on a private-party sale, I would take the mid-point between those two value. But then, I am not a tax professional.)
29 November 1998
Updated 2 March 2015
In California, a new law (Business and Professions Code, §22930) requires a charity that solicits donations of vehicles and asserts some percentage of the proceeds it receives must follow a specific formula when describing that percentage. The formula disallows as proceeds any costs of soliciting or selling the vehicle, even when the charity pays those costs itself out of the proceeds. In other words, only funds applied to actual charitable purposes can be counted.
1 January 1999
Donating a car or other possession is not as simple as the advertisements indicate. For any item worth more than $500, the donor must file Form 8283 with his or her federal income tax return.
For donations totaling more than $5,000 (except for publicly-traded securities or for non-public securities worth less than $10,000), additional rules apply. The recipient charity must sign the Form 8283. An appraisal is required from a qualified appraiser who is not involved in the transaction — not connected to the donor, recipient, or broker selling the item. Finally, if the charity sells the item within two years after receiving the donation, the charity must then file Form 8282 and send a copy of that form to the donor.
6 February 1999
Problems with car donation campaigns have become so serious that the IRS finally had to issue a memo on the subject. Two key points are raised in the memo:
According to the memo, a taxpayer claiming a donation for a vehicle when the ownership did not actually pass to a charity or claiming an excessive amount for the deduction faces more than merely having the deduction disallowed. The IRS is prepared to assess the same penalties as if an abusive (illegal) tax shelter were claimed.
25 February 2002
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