Clearing your old car out of the garage to make room for the latest and greatest wheels on the block can be a serious hassle. You have to pay for an advertisement, wait for strangers to call, haggle over the price and, assuming you sell the car, pray that the buyer doesn't call back claiming it immediately broke down. Sometimes it's easier to trade the vehicle in or, as three-quarters of a million Americans do every year, donate the ol' hunk of junk to charity.
Donating has its advantages. It's simple, since many charities offer pickup services; it makes you feel like a real philanthropist, since you're giving a car, after all, and not just writing a check; and it can generate a tax write-off. But as of January 1, things got more complicated on that last point. The corporate tax bill President Bush signed into law last fall came with strings attached for car donors. Namely, the amount you can deduct for the value of the vehicle almost certainly dropped when 2005 rolled around.
The old standard allowed you to deduct "fair market value" for a donated car--a squishy term that left plenty of room for padding. As long as you had a receipt from a charity, you could claim up to $5,000 based on a value you established yourself. The new standard only allows such latitude if the car is worth $500 or less. Any more, and you'll have to get a receipt from the charity listing the amount it actually received after selling the car.
The difference between fair market value and what a charity actually earns for a car can be substantial. The General Accounting Office tracked vehicle donations in 2000, for example, and found that charities received 5 percent or less of the value donors claimed on their tax returns two-thirds of the time. Sure, your 1997 Acura Integra is in "good" condition and is still worth $4,835, according to Kelley Blue Book. But if you donate it to a charity that sells it for $750, then $750 is the extent of your deduction.
Not all charities are created equal, however. Many offload cars on the cheap to middlemen, who turn around and resell them. Others organize and hold their own auctions, in some cases earning far more for the vehicles than if they went through middlemen. Before making a donation, talk with your chosen charity about how it handles the cars and how much it might expect to get for your particular vehicle.
If you want to donate simply to boost your favorite cause, no problem. But if you want to help a cause and help your tax return at the same time, you'll have to do a little extra homework starting this year.
Scott Bernard Nelson is deputy business editor at The Oregonian and a freelance writer in Portland, Oregon.
This story appears in the February 2005 issue of Entrepreneur. Subscribe »
