Is Donating Your Car Worth the Tax Deduction?

Eva Rosenberg for Equifax writes: Whether they’re on the Internet, the radio, or TV, there are a lot of tax tips floating around. Not surprisingly, many of them aren’t worth following.

Many people accept tax advice from all the wrong places rather than spending the money to hire a professional. This is a prescription for disaster—listening to bad advice could cost you big bucks in the end, particularly when you are donating your car.

Common tax advice that isn’t always worth following when donating a car

You’ve probably heard commercials on the radio or seen them on television telling you that you can donate your car to charity for a tax deduction. Some even offer you cash and a trip in addition to the deduction.

If you donate your car to a charity that offers these perks, however, you’ll be required to deduct the retail value of the trip—even if you don’t use it—and the amount of money you receive. Once you take these into account, along with any repairs that need to be made to the car, you may find the deduction is worth almost nothing.

In other words, donating a car sounds like a good idea, but for many people it’s simply not worth it. You may be better off trying another alternative.

Alternatives to donating your car

Use the car as a trade-in. You can often negotiate a trade-in value that’s higher than the car is really worth. Dealers have an incentive to haggle with you—they get to sell you the new car—and the money you get may be more substantial than the value of the charitable deduction.

Sell the car and donate the proceeds to charity. If you still want to give to charity, consider a monetary donation instead. The resale value of the car may be higher than the donated value, giving you more money to donate and deduct.

Give the car to a family member or friend. If you cannot use a charitable deduction—for example, if your expenses exceed the standard deduction for your filing status —give the car to a friend or family member. Let him or her choose to donate the car and reap the rewards of the tax deduction, if so desired.

Whether you sell, donate, or give away the car, be absolutely sure that the title has been transferred via your state’s department of motor vehicles. If it’s not transferred, you could end up with someone else’s traffic or parking violations on your driving record.

Still want to donate your car? Keep these things in mind:

Your donation might not be worth anything. You may only deduct the real value of the car. If it doesn’t really run, or if it requires thousands of dollars of work before it’s a suitable vehicle for someone, your legitimate donation will be worth practically nothing.

You don’t get a deduction until the charity sells the car. The charity can’t give you the paperwork necessary for your deduction until it sells the car or decides to use it. Because of this delay, people often forget to get the paperwork—which you must have before you file your tax return.

You could be audited. If you claim a large amount for your donation, you’re apt to be audited. Be sure to take photographs of the car and document the fact that it is in working order and not in need of major repairs.

You must itemize. In order to claim the deduction, you must itemize your deductions using Schedule A. (Many of the people making clunker donations don’t use Schedule A, so they get no benefit from the donation.)

Before you make any tax-related decisions, get solid advice from your tax professional. Remember to ask whether any follow-up steps or specific documentation may be required.