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."
For a decade, Melwood has raised funds for its programs, which assist people with developmental disabilities through advertising campaigns that have made it almost synonymous with car donations while "taking our mission straight to the public," says Roberts. Melwood still advertises its program, but he expects "fewer charitable dollars going to our mission."
So do other programs. Goodwill Industries International Inc. spokeswoman Christine Nyirjesy Bragale says car sales at local Goodwill programs through August were down 4 percent. But she attributes that to a flood of donated vehicles at the end of 2004 from donors taking last-minute advantage of the old law. It's been all downhill since then.
"In January, we saw a 46 percent increase in sales," says Bragale. "In February, a 32 percent increase. But then in March, our car sales began to drop. Last month, we had a 35 percent decrease. We have some Goodwill organizations who are saying they're seeing drops as high as 40 and 50 percent in car donations."
Another impact is that the quality of donated cars is dropping because donors aren't as likely to get a deduction that comes close to what they can sell their cars for themselves. Remember Gary Goldberg? His sister-in-law in Indiana donated her '89 Toyota Celica to a charity recently and got a $345 deduction -- less than a third of what the Kelley Blue Book reports she might have sold the car for herself and less than a sixth of a used-car dealer's price on the car.
"If they have that valuable a car, they are not going to give it," Bragale says of today's donors, adding that the new law requires anyone donating a car valued at more than $500 to do so without knowing the deduction amount beforehand. "People don't want to take the risk anymore. It's a very disappointing picture."
Michael Nilsen, spokesman for the Association of Fundraising Professionals in Alexandria, says its members are reporting car donations down 20 to 40 percent this year. His hope is that people tend to adjust to changes over time, he says, but he's not optimistic.
"People donate a car because they want to get rid of it. But if they don't feel they're going to get enough value out of giving it, I'm not convinced we're going to see the donations go back up," he says.
Smith says the IRS offers this advice to taxpayers considering donating cars valued at more than $500:
* Look over your tax situation and try to determine whether the deduction would save on your taxes. To get the tax break, you must itemize your deductions. Don't itemize? You're better off selling the car. And, if you do itemize, your total deductions, including the car donation, need to add up to more than the standard deduction ($5,000 for single and married filing separately; $7,300 for head of household; $10,000 for married filing jointly) to make sense.
* Before donating: Check to make sure the charity is a reputable and eligible 501(c)(3) tax-exempt organization. The IRS database of exempt organizations on the IRS Web site (www.irs.gov) lists all qualified organizations.
* Before filing your tax return, make sure you received the written statement of the selling price from the charity. The new law requires charities to provide that within 30 days of selling the car. You must include a copy of it with your tax return.
With these new limitations, says Smith, "it doesn't mean you shouldn't donate your car to charity, but realize you may or may not save anything on your taxes."
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