Judging by some of the advertisements, it’s easy to think that donating a vehicle will save you thousands on your tax return, but does it really? And exactly how much are you likely to gain from a donation?
You’ll notice that there are very few reliable examples online with car donation charities selling the benefits in terms of “deductions” as opposed to tax saved. That’s because understanding whether car donation is right for you demands a clear understanding of the difference between a tax credit and a tax deduction.
Unless you’re a tax expert, it is easy to confuse tax credits and deductions — even assuming they’re one and the same thing. A tax credit is just that — a credit against your income tax liability or, put another way, a dollar-for-dollar reduction in how much tax you must pay.
A tax deduction has nothing to do with the tax you owe. It is a deduction against your total income for the year or, put simply, an amount that you subtract from your total earnings before you calculate your income tax.
So, how does this apply to a car donation tax deduction? Let’s assume you have a car that has a fair market value of $5,000. If you sell that car on the open market you will receive $5,000 or close to it.
If you donate it to your favorite cause or charity, it is likely that the charity will pass it to a third party who will sell it at auction. Unfortunately, auctions tend to suit buyers more than sellers with cars generally sold for less than their market value.
Let’s say that it is sold for $3,500 at auction and within the prescribed IRS time limit, the charity sends you an official notification, which permits you to itemize your donation and deduct $3,500 on your tax return.
The question is how much is this really worth to you? If you are a standard rate taxpayer you will effectively be saving 25% of the $3,500 you are allowed to deduct — a mere $875!
Not only are your tax affairs now more complicated (as most people don’t have to itemize deductions), but you have come up over $4,000 short in comparison to selling it. True, you have saved yourself the hassle of selling your car, but is it really worth it?
If you really wanted to donate to charity, you could still have made a cash donation of $3,500 and then kept $1,500 for yourself. This way, you could have deducted $3,500 and saved $875 on your income tax.
In many cases, especially very old or junk cars where the deductions are a lot less, donating your vehicle to charity makes a great deal of sense. For higher value vehicles, however, it’s worth checking with your accountant or tax advisor first to find out exactly how much you are really going to save.
For more information about car donations, visit www.donatecar24.com.
About The Author
Chris Hawkins is a personal finance and investment expert who contributes regularly to a number of websites and blogs including DonateCar24.com. This site provides help and guidance for those interested in donating a car to a qualifying s501(c )(3) charity, educational or religious institution.