Does Charity Car Donation Still Make Sense Under Tougher IRS Rules

You can still deduct the car's full market value — if you know where to look

When my aging Nissan Sentra began to need several hundred dollars' worth of repairs every few months, I considered donating the once trusty blue sedan to charity. I knew of several pet charities that would be grateful. Besides, donating a car seemed so much easier than selling it. No fixing it up. No phone calls. No Tom, Dick and Harriet knocking at my door — or standing me up on a Sunday morning as I waited for Godot.

The biggest incentive, though, came from the tax deduction. At the time, the IRS was allowing donors to deduct the "fair market value" of the donated car from their taxes. So donating the Nissan, whose market value was about $2,400, meant $792 off my taxes (assuming a 33-percent tax bracket). Every year, more than a million Americans donated their cars just like this.

Too good to be true
Unfortunately, whether through ignorance, confusion or greed, a substantial percentage of car donors have been deducting the full "suggested retail price" — what a dealer would get for reselling your trade-in — instead of the fair market value. That's far more than the IRS had intended, costing the government millions in lost tax revenue.

The charities weren't making much, either. Most of the donated cars were sold by the charities for a pittance at auction, and middlemen who administered the programs on behalf of the charities took a large percentage of those meager profits.

So in 2005, the IRS changed the rule. From then on, if your car is valued at more than $500, the deduction is limited to the charity's actual selling price. The donor must attach a statement of sale to the tax return in order to receive the deduction. (The charity is obligated to provide the statement within 30 days.) You are not entitled to know the deduction amount before donating your car.

That leaves most donors in the dark — and may leave some businesses and charities in the red.

Good for government = bad for business?
Taron Reeves owns America's Car Donation Charities Center, one of many commercial fundraisers that give a percentage of profits to their charity members. Donations through Reeves' company went down 30-35 percent after the new law went into effect. What's worse, his overall profits have dropped a full 50 percent, as owners of "higher-value cars" — anything more than $2,000-$3,000 — stayed away in droves.

Since the average car that Car Donations Charities Center now receives for charity is valued at only $250-$300, Reeves has had to cut back on his overhead and expenses to maintain his non-profit business. A native Texan, Reeves says he now has to work a little smarter and a little faster than he used to; nevertheless, he remains undaunted.

"There are lots of cars out there," he said. "I look at one that's sitting in someone's yard, waiting to be donated and say, 'That's a $50 bill just flapping in the wind right there.'

"As long as we can accommodate the donor and not lose money for the charity, we'll do it."