Car Donation: Weeding Out False Claims

Personal Finance
an individual hands over car keys after a car donation

Wanting to get rid of an old car? Although there are many legal ways to sell the old car, one way that seems to entice many consumers is the idea of a car donation. These donation opportunities help a consumer get rid of their car for a big tax deduction they can write on their income tax. However, there are many concerns about the car donation industry and the IRS has tightened rules regarding car donation and tried to create consumer campaigns warning consumers of scams.

First Things First

The first thing to note is how these car donations work. Knowing how they work will help protect consumers from fraud. A major thing to look out for is any institution participating in a car donation cannot claim to the consumer that they will get a tax credit. Consumers are only eligible for a tax deduction under IRS rules. Any firm claiming that the consumer can be given a tax credit could be a scam. Another factor to consider is who the car is being donated to. Only a 501(c)(3) can be given a car donation. No other entity can receive a car as a donation where the consumer can have a tax deduction.

Research Your Deduction

The second major concern is knowing what the consumer is eligible for a tax deduction. Any slick advertisements of full market value returns are wrong. Indeed, it is usually more profitable for the consumer to sell their car on the open market than donating it. For example, the first thing to know is that the tax deduction for the car donation under IRS rules is calculated in comparison to the person’s tax bracket plus the car’s fair market rate (not its retail price). In many situations, it could be worth more reselling the car on the market than donating it.

Use Your Resources

Consumer Reports provides an example where if the consumer lies within the 28 percent tax rate for income and they donate a car that has a resale value (not retail value) of $2,000, the IRS will allow a $560 tax deduction for that consumer. Another issue is how the charity uses the car. The IRS has codes where if the car is donated to a charity for charity actions, like driving the elderly to different places, then the consumer is able to have the full resale value considered with their tax deduction (though the deduction is lower than the full re-sale value). However, if the charity auctions off the car, then the consumer can only calculate their deduction based on the auction price, which can be quite low. This will just reduce the full amount of the tax deduction and further show that consumers may be better off selling the car. Any charity event or organization that advertises otherwise is scamming the public.

These major concerns should not detract a person from considering donating their car. Donating can help many 501(c)(3)s with major needs and can help unload the old car to an institution that needs a car. It is just important to be protected against scams that claim the consumer will be eligible for full retail or resale value or be given a tax credit. Knowing these rules will help.

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