Why It's Better Not to Give Your Car to Charity

Jeff Brown for The Street writes: The holidays are the time of giving, and just happen to come as many people are looking for tax deductions to slip in before Jan. 1. So how about handing an old vehicle to charity?

It's a perfectly good way to give to charity, and some key steps can ensure you and the charity get the most out of the donation. A tax deduction for a charitable donation could come in handy next April, and could be used for additional giving.

But first, let's be honest. From a purely financial perspective, giving a vehicle away is not the most profitable move. For every $100 in value, you might save $25 in taxes, assuming a 25% tax bracket. If you sold the vehicle, you'd pocket the full $100. (There'd also be no capital gains tax if the vehicle were sold for less than you'd paid.)

And if you intend to buy another vehicle, the old one has turn-in value. That may be a tad less than the value if sold to a private party, but still a good deal more than the value of the tax deduction. 

This is why these donations often involve vehicles on their last legs. Many charities will take vehicles that don't even run, as they can be auctioned to parts salvagers. Typically, the charity will pick the vehicle up, making donation an easy way to clear your life of a clunker that wouldn't have much value in a sale or turn-in anyway.

So, if you want to give to charity, why not do it with an old vehicle?

Edmunds.com, the car-shopping site, says that starting in 2005 donors could no longer simply claim deductions based on fair market value derived from sources such as Edmunds and Kelley Blue Book. Since then, the value claimed is the value realized by the charity, which reports the price to the donor in writing. The change was meant to curb inflated claims. Unfortunately, charities are not likely to hang tough on sale prices, because they don't want to store old vehicles. 

To get the deduction, you must give to a qualified charity, a 501(c)(3) organization approved by the IRS and listed on its exempt organizations site.

As with almost all deductions, this one can be claimed only if you itemize your tax return. But for many people, itemizing does not make sense because it produces less tax savings than they get with the standard deduction available to anyone who does not itemize.
Be sure to keep all paperwork related to the donation, especially that report from the charity on the deductible amount.

What charity should you choose? Charity Navigator, a nonprofit that advises on giving, suggests selecting a charity that accepts direct vehicle donations. Charities that don't take direct donations typically use intermediaries that skim a portion of the proceeds, sometimes quite a large one. 

If the vehicle runs, the charity will get more out of the donation if it does not have to pay to pick it up. Also, look for a charity that has low administrative costs. That data's on (the Charity Navigator site.   

Though giving the vehicle itself is hassle free, Edmunds says car owners can often make larger donations by selling the vehicle themselves and giving the proceeds. If you're willing to go to the trouble, there's a good chance you can get a higher price than the charity will realize at auction.