question: We are buying a new car and have discussed whether it is better for us to donate our car or just sell it. The Blue Book is worth approximately $ 7,500 and we haven’t received any serious offers after over a month of advertising. A local car dealer offered us $ 6,500. Does it make sense for us to donate the vehicle and receive the depreciation as a single deduction or just sell it?
Reply: According to the old tax law, you were entitled to an individual deduction in the amount of the fair value of the vehicle at the time of the contribution. Fair value was defined as the amount a willing, unrelated buyer would pay for the car.
Obviously, the determination of fair value was subjective and open to broad interpretation. The value of the “Blue Book” has often been used and accepted in order to “objectively” determine the fair value. Often the value of the “Blue Book” was higher than the realistic selling price on the free market. The greater the difference, the greater the tax benefit of a car donation.
However, the IRS has tightened the rules to limit the charity’s deduction to the actual sale price of the vehicle and to make the “fair market value” the actual market value! You should obtain a Form 1098-C from your charity that lists the information required for the withdrawal.
Now back to your question:
Before donating your car, I recommend that you analyze the economics of the contribution versus the money you received when you sold the car. To do this, you need to multiply the deductible contribution amount by your combined federal and state marginal tax rate and compare the result with what you would get if you were to sell the car. This calculation will help you determine the financial ramifications of your decision (tax savings versus cash from a sale).
Let’s say your marginal federal and state tax rate is 30% and the charity sold your car for $ 6,500. Save $ 1,950 ($ 6,500 x 30%) with a $ 6,500 discount. Compare that $ 1,950 to the $ 6,500 the dealer would give you and now you can make an informed decision. Economically, you get 30% of the sale price of your vehicle for charity versus 100% of the sale price if you can sell it yourself.
Once you understand the financial ramifications of donating a car, now is the time to weigh the dollars involved in the emotional and societal rewards of supporting the nonprofit.
Barry Dolowich is a Chartered Accountant and owner of a full service accounting and tax practice with offices in Monterey. He can be reached at 831-372-7200. If you have any questions, please contact Barry at PO Box 710 Monterey, CA 93942-0710 or email [email protected].