SLADE COLUMN: What to do with those extra cars
I wonder who all these people are, who apparently have an “extra” car or boat sitting in the yard. I keep hearing radio ads urging them to donate their “unwanted” vehicles to charity.
With the deadline for making 2012 tax-deductible contributions to charities fast approaching, you've probably heard some of those pitches or seen the billboards as well.
Why would a charity want your car, boat or airplane? Well, for most charities that accept such donations, this makes great sense. Many simply accept the donation and then sell it at auction, or through a broker, and turn the donation into cash.
But would it make sense for a typical taxpayer to donate a vehicle in order to gain a tax deduction, as some charities suggest? I don't mean to be a Grinch, but the answer is no.
Yes, there could be a federal income tax benefit if the donor has enough deductions to make itemizing deductions worthwhile. But most taxpayers take the standard deduction, and don't itemize.
For those that do itemize, donating a vehicle and claiming a tax deduction probably makes less sense than selling it and donating some of the cash proceeds.
What's it worth?
Taxpayers often confuse tax deductions with tax credits. A tax credit, such as the child tax credit, is a dollar-for-dollar reduction in the tax you owe. A tax deduction, such as the one for charitable contributions, is subtracted from the amount of income that is taxed, so someone paying a top federal rate of 25 percent would save 25 cents in tax for every dollar of itemized deductions that exceeds the value of their standard deduction.
So, if you're planning on making some charitable donations, and you have a used car or boat you plan to sell or want to get rid of, is there some reason why it makes more sense to donate it, rather than selling it and donating cash?
A donation does allow you to avoid the cost and hassle of selling a vehicle, but it will complicate your taxes, because extra forms and certifications are required.
The key here is, what is a vehicle (or boat, or airplane) worth when it's donated to charity? The regulations for valuing such donations were once pretty lax. Before the rules were tightened up, one Governmental Accounting Office study concluded that charities received just 5 percent of the vehicle value that taxpayers were claiming as deductions on their tax returns.
In other words, people were claiming $10,000 tax deductions for vehicles that charities were selling for proceeds of $500. That led to some rule changes that took effect in 2005.
Today, if you donate a vehicle to charity, the amount you can claim as a tax deduction will in most cases be the amount for which the charity sells the car, which could be far less than the owner could have sold it for. The IRS will require extra forms and documentation to verify the donation and value if it's worth more than $500.
Case of Anita
To see the pros and cons, let's consider the example of Anita, which appears in an IRS publication about donating vehicles.
“Anita donates a used car to a qualified organization. She bought it 3 years ago for $9,000. A used car guide shows the fair market value for this type of car is $6,000. However, Anita gets a Form 1098-C from the organization showing the car was sold for $2,900. Neither exception 1 nor exception 2 applies (the charity is not using the vehicle, or giving it to a needy individual). If Anita itemizes her deductions, she can deduct $2,900 for her donation.”
So, Anita gave her $6,000 car to charity, they sold it for $2,900, and she got a federal tax deduction worth $725, assuming she's in the 25 percent federal income bracket. If she had sold the car for $6,000, she could have given $2,900 to charity, and kept $3,100. Or, she could have given the whole $6,000 to charity, and claimed a tax deduction worth $1,500.
The question for Anita is whether it was worth giving up thousands of dollars in order to avoid the hassle of selling her used car.
If Anita was determined to donate her vehicles and wanted to maximize her tax deductions, she could have tried to find a charity that would use the car for charitable purposes, such as delivering meals, or a charity that would give the vehicle to someone in need of transportation, as part of the charity's mission. In those cases, she would have been allowed to deducted the full $6,000 fair market value of the vehicle.
The bottom line is, donating a car or boat to charity is a good way to quickly get rid of a car or boat, but selling it and then making a cash donation to charity would usually make better financial sense.
Reach David Slade at 937-5552 or Twitter @DSladeNews.