You constantly hear ads from various charities, telling you to donate your old car to them, and get a tax deduction (for the value of the donation). A friend of mine did this-he actually CLAIMED a deduction of $2000.00, for a worthless wreck that couldn’t be (legally) sold (it did not pass the state safety inspection).
So, is the IRS about to come down on these con men? How can you actually donate something that is effectively worthless, and yet take a tax deduction?
It’s the responsibility of the DONOR to establish the value of any donation of goods or services, based on their market value. It’s up to the IRS to determine whether that valuation is in line with fair market value.
All the various charities do is use (or sell and keep the money) what’s donated to them. If your friend decided to claim far more than the value of the car, and the IRS audits him, he’ll be the one who suffers the consequences, not the charity.
You are supposed to deduct the “fair market value” of the car. If the car doesn’t run and you’d have to pay a wrecker to take it away, it is worth $0.00. People, at the prompting of the charities themselves, have abused this by deducting the blue book value of the car without taking into account its condition. The IRS is reportedly going to look more closely at some returns, but they won’t be able to catch even a small fraction of the people abusing it.
I hear the commercial every day on the radio and I can’t believe that the IRS doesn’t go after the charities for spreading lies. Your car or boat is never worth more as a tax deduction than if you sold it yourself. That is impossible. I would call it a scam and I don’t donate anything to the charities which are involved.
Ralph,
The answer is simple: lie to the IRS. I donated an old boat to Big Brothers/Sisters once. Same idea. They WON’T appraise the item for you. They very carefully word their paperwork so the onus is on you to decide how much it’s worth.
So you can pick a number out of the air. Like any other form of tax cheating, it works great until you get caught. And most folks can go for decades doing stuff like this before they get (un)lucky and get that ominious letter from the Feds.
A few years ago the IRS tightened up the regulations and the reporting rules on some types of charitable deductions. If this donation technique continues to grow, we can expect some action in the next few years.
Then again, Congress knows that quashing popular tax dodges, even the dodgier ones, is not always popular. So they may sit on it to keep the masses happy while they meanwhile give far larger loopholes to the superwealthy and the corporations. “Always keep the audience distracted”; it’s the magicians’ credo as well as the politicians’.
As a practical matter, many people are unable/unwilling to sell a used car. Would you put your name/address in the newspaper and invite gosh-knows-who over to your apartment to test drive your car? A lot of folks, particularly women, would rather give the car away than do that.
Sure you can take it to a used-car dealership and they’ll give you a few bucks for it, but that feels a lot like being a total victim, becuase that’s exactly what it is. They’ll give you 50 cents on the dollar at best. Why? Because they can. They know you’re in a pickle if you walk in the door.
Want-ads aren’t cheap, and weekends and evenings are precious. The true cost to sell a used car may easily be $150 or more.
So it becomes pretty easy to donate it, declare to the IRS it was worth about 3x what it really was, and you’re ahead in terms of money, hassle, and safety.
What’s not to like?
Yes, this is illegal and unethical. But looking at the overall situation, there’s a lack of ethics throughout the chain of used-car commerce. It’s a dirty biz; touch it and get soiled. Sadly more and more of American businesses are run on the same “rip off the other guy faster than he rips you off” model.
Funny, I’m doing this exact same thing today. Salvation Army even offers to pick up car and tow it. I blew a tire, bent oil pan, and cracked transmission. I swore I would not repair the car again (although this one was my fault). I’m just not sure about determining the fair market value of the car (Kelly Blue Book do I use “trade in value”, “Private Party Value”, or “Used Car Retail Value” ? ? ?
When I do Used Car Retail Value, I can’t enter the condition in…
I’m not into ripping off the govt, just want to do it right. . .
Stover9, try www.edmunds.com, instead of Kelly. That one lets you put in the condition, and their valuations are regarded as being fairly accurate (unlike the NADA guides, which run high). After being honest about the condition (it sounds like what Edmunds calls “damaged”), I’d take the private party value. That’s certainly defensible as “fair market value.”
Actually, in a curious way, many people may not be cheating Uncle Sam as much as they think. The parts value can often be much more than the value of the car itself. StinkPop claims that a car that must be towed is worth $0.00, but in fact, such cars are sold for cash in the want ads every week. All but the very worst cars still have vsaluable parts, and even the worst have scrap metal value (though with the high car turnover in our society most scrap dealers don’t even bother to pick-up cars anymore).
Most cars donated to charities to charities in the US aren’t really in such terrible condition, they’re just inconveniences to their owners. Travel outside the most affluent countries and regions, and you’ll see the real meaning of ‘running wreck’.
Many charities run businesses (Goodwill being the best known), but do any run salvage yards? It’s my impression that most charities only fix the most cherry-picked cars, if they fix any at all, and given the number and quality if cars donated, I’d be interesting in knowing for future reference which charities do a better job of reusing parts.
Another way to go about this is to donate the car to a high school with a shop class, as a project for the students to work on. That way, it’s OK if the car doesn’t run, since the educational opportunity is in making it run. But I’m not sure what value would be appropriate to claim in that case.
Yes, a car that doesn’t run could be sold for parts. If you sell the entire car for its parts value (not breaking it up yourself), you generally don’t get more than a few hundred dollars. If you are willing to actually part it out you can make a lot more. That’s all true, KP, but the IRS don’t give a fat rat’s ass.
The regulations say that you can only deduct the fair market value of the vehicle. You can’t say “I could have parted it out and made $8,000”. You can only say “I could have sold the car for $300” (whether you sell it in its entirety for parts or sell it for use as a driveable vehicle). You can only deduct what you could actually have gotten if you sold it instead of donating it. For most cars that get donated the fair market value is quite low, yet people claim the retail value. If the car was actually worth thousands, nobody would donate it.
I abhor this scam, but the thing that gives me comfort is that a large portion of the people who donate cars end up with no deduction at all because they don’t itemize deductions. They end up getting nothing for their car. The charities running the scam don’t mention that fact.
Not exactly relevant to the OP, but the local “donate your car to charity” here got busted earlier this year because the people running it were – surprise!!! – selling the cars and keeping the money instead of putting it to charitable use. Amount stolen amounted to quite a few hundreds of thousands of dollars. Bah humbug on the whole racket. It’s harder each day to find any reason to feel good about my fellow man.
The local “Cars for Causes” out here lets you name your charity. They take your car and auction it off. They keep half and the other half goes to your charity.
Haj
Unfortunately, it looks like Congress is looking to put an end to the honor system that allowed people to declare the amount of their donation. Story.
So, once again, it looks like the folks who abuse the system will just end up causing more headaches for those who are willing to play by the rules. (Thanks a lot, greedy people: you have managed to screw Uncle Sam and honest folks who donate to charities. Good work.)
If you’re planning to make any car donations in the near future, I’d say make them in 2003. It looks like there’s more paperwork and hassle in the works if you hold off and donate in 2004.
I was at the Salvos helping out last year and some “wacky broad” donated 10 computers. She didn’t donate any monitors, no keyboards, no mouses and then told me she wanted the hard drives back.
I told her to keep them. Can you believe what people will do?
I don’t think of this as a scam at all. We had a worthless junker in our driveway for over a year because Mr. Legend had an emotional attachment to it (“I could fix it up”), and the city cited us for having a non-working vehicle on the property. It would have cost us over $100 to get someone to tow it away, but we were able to donate it to a charity instead. We got rid of a problem for free and the charity got the salvage value of the car. I saw it as a win-win situation, regardless of the tax write-off, which we didn’t even bother trying to take.
I think of this in the same way as charities soliciting donations of old clothing and household items. Sure, I could possibly sell the items in a garage sale, or I could take a tax deduction for their value after I donate them, but just getting rid of the stuff is really all the reward I need. Knowing that a charity makes money from my worthless junk is icing on the cake.
What gets me is that people are willing to fool themselves to the point of actually believing that a charity actually gets all the money from these so - called donations, as if your local kidney foundation/girl scout troop is parting out vehicles or fixing up junkers and selling them for profit.
The charity might get a flat fee from a recycler, say something like 50 bucks, for all cars donated, which, from the recycler’s point of view, might be generous, given the condition of most cars donated.
But when they get one that is worth $1000 cash or more, think they give anything back to the charity?