Car Rules Drive Donors Away

Gary Goldberg hears the ads on the radio all the time. Donate your used car! He doesn't get it.

"I heard the umpteenth ad for this today and still wonder how this benefits the car owner," says the Silver Spring resident, who crunches the numbers and concludes that donating cars to charities, if for the tax break alone, just doesn't add up -- at least not under the law that went into effect this year.

"If your car really has a Blue Book value of $6,000, and they can only sell it for $1,000, they're hurting both themselves and you," says Goldberg, figuring that the actual tax benefit of a $1,000 deduction for, say, a hypothetical 33-percent-bracket taxpayer would be as little as $330. "Any idiot can sell a $6,000 car for more than [that]. . . . I can only see where this works if the car isn't sellable."

Donating a used car has long been an attractive alternative to listing a clunker in the classifieds and then entertaining every low-balling browser who wants to come by the house on Sunday afternoon and kick the tires. The big payoff was always that you got rid of the car with no aggravation. And then there was the feel-good factor of contributing to a cash-strapped, deserving charity. But the tax break, that was the big attraction!

But donating cars isn't what it used to be since January, when a new federal law slammed the brakes on those freewheelin' car-donation deductions of yesteryear.

Seems many of the 1.2 million or so taxpayers who donated cars annually in the past inflated their car's fair-market value, looking in the Kelley Blue Book and using the dealer's "suggested retail" price for their rundown roadster's fair-market value. Some charities competing for donated cars even advertised that donors could claim full Blue Book value.

In a 2004 study, the Government Accountability Office, Congress's investigative unit for money matters, reviewed tax returns for the 2000 tax year and found that about 733,000 taxpayers claimed deductions for donated vehicles they valued at $500 or more. In half of 54 car-donation cases examined more closely, the GAO found that charities resold those vehicles for less that 10 percent of the value claimed on the donor's tax return.

In other words, those taxpayers were claiming fat tax breaks. So fat that the excessive car valuations cost the U.S. Treasury $654 million in tax revenue in 2000, according to the GAO. "When you looked at the deduction versus the cars being donated, there was a discrepancy. There were some real concerns and compliance issues," says Internal Revenue Service spokesman Eric Smith. "There were situations where people were being told they could deduct the Blue Book value, period."

An additional problem was that, whether the value of the car was overstated or not, the charity usually handed it over to a middleman who took the bulk of the profit.

So last year the feds tied a knot in the loophole. Now, in general, the tax deduction for a car valued at more than $500 is limited to the actual selling price the charity receives. The charity is required to report that price in writing to the donor within 30 days of the sale. And the donor must attach the charity's statement to his tax return -- or the deduction will be denied.

During debate over the changes last year, one coalition of charities predicted the law would "virtually eliminate car donations." So, now, 10 months later, are charitable car donations running on empty?

"Clearly there has been an impact," says Thomas P. Roberts, director of government relations at Melwood, a charitable organization in Upper Marlboro. "What we have experienced so far reflects what we understand to be typical of the programs in general across the country -- a 30 to 35 percent drop in cars being donated. It is significant."