Thinking of donating your clunker to charity for a nice tax deduction? Proceed with caution.
The gifting of used cars to “charities” has become a favorite way for Americans to dispose of unwanted vehicles. And why not? You can avoid the headache of selling or junking the car, help a charitable cause and lower your tax burden all at the same time.
Unfortunately, the experience is rarely, in reality, such a win-win situation. Not only do charities typically see little of the proceeds from a used car sale, but donors can run afoul of the taxman if they’re not careful.
At the end of the day, donating a used car could be the least cost-effective way to give to a charity,” said Stephanie Kalivas, an analyst with CharityWatch, an organization that monitors the charitable giving industry.
The problem is the industry is riddled with fraud and misrepresentation. Attorneys General from multiple states have investigated car donation charities for false advertising and self-dealing. Many of the organizations are for-profit intermediaries that give token contributions to a participating charity. Others misrepresent the cause they support and/or give low percentages of their funds raised to their stated targets.
Kars4Kids, for example, a New Jersey-based organization with an insipid yet highly successful advertising jingle, has received more than 450,000 car donations, according to its website. The organization, however, got a D rating from CharityWatch because it distributes less than 50 percent of the money it takes in and because, despite a national advertising campaign, it fails to adequately disclose that the money goes to benefit Jewish children only, and almost exclusively in the New York/New Jersey area.
“They’re not transparent about what they do,” Kalivas said. “A lot of these organizations mislead the public, and people need to be careful.”
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For people solely looking to dispose of an unwanted car for which they won’t take a tax deduction, it may not seem to matter what happens to the vehicle and who benefits. Kalivas, however, suggests that charities would be much better off if people sold their cars themselves and donated the proceeds, or simply called up charities they know to find out if they have car donation programs.
If the car in question is valuable and you plan to take a deduction for it, protect yourself. Individuals donating cars can inadvertently mark themselves with big red flag for Internal Revenue Service auditors.
When donating a car, here are eight key things you should consider to maximize the benefits to charity and minimize the risk to yourself.
1. Research the charity you plan to give it to. If it doesn’t have 501(c)(3) non-profit status with the IRS, it is not a charity and your donation is not tax-deductible.
2. Pick efficient charities to give to. There are multiple organizations such as CharityWatch that evaluate charities and rate them for efficiency in supporting their causes.
“At the end of the day, donating a used car could be the least cost-effective way to give to a charity.”
6. Drop it off. If the car is road-worthy, drive it yourself to the charity you’re donating to. It saves money and ensures you’re not giving the car to some unrelated, for-profit intermediary. Make sure to sign over the title of the car to the organization and that a representative signs it, as well. If someone is picking the car up, have them sign the title and take a photocopy of it. People have been on the hook for liabilities on donated cars that were not properly signed over to a new owner.
7. Snap it. Take pictures of the car and keep receipts for work and repairs done on it — particularly if you’re claiming a deduction for it.
8. Read up. Read IRS publication 4303 — A Donor’s Guide to Car Donations.