New-car buyer can benefit by donating the old one

December 14, 2003|By EILEEN AMBROSE

WHEN Mike Schmidt bought a new car recently, he didn't bother to trade in his old one.

"Over the years, I've lost my taste for car dealers and haggling," said Schmidt of Dundalk.

Instead, for the third time in a half-dozen years, Schmidt donated a car to charity. He turned over the title of his 1993 Toyota Camry to the National Kidney Foundation of Maryland and waited for the car to be towed away. When he files his tax return, he expects to claim a $2,000 charitable deduction for the donation.

"It's very hassle-free," he said.

Charities have been turning to vehicle donations to raise money, and at least 4,200 charities nationwide now offer such programs, according to a new report by the General Accounting Office.

For vehicle owners, it's an easy way to get rid of an old car, help out a charity and get a tax deduction to boot. In the 2000 tax year, about 733,000 returns deducted $2.5 billion for vehicle donations, trimming their tax bills by $648 million, the GAO reported.

Oversight of vehicle donations by the Internal Revenue Service and states is limited, the GAO said. States have uncovered some problems, though, including donations being sought on behalf of bogus charities.

There also have been complaints of individuals finding a donated car coming back to haunt them because the transfer of the vehicle's title was improperly handled, experts said.

As the end of year approaches, charities are revving-up solicitations for vehicle donations from those who may want to squeeze in one more tax deduction. Potential donors can avoid problems, and make sure their donation is doing the most good, by taking some precautionary steps, experts said.

The first is to make sure the nonprofit is qualified to receive tax-deductible donations. One source for this information is IRS Publication 78, available online at www.irs.gov.

Most states, including Maryland, also require charities seeking donations to register with either the state attorney general's office or secretary of state's office, experts said. These records usually reveal how long a charity has been around and what portion of its revenue goes to programs.

Visit the charity's Web site to find out more about it and how it uses its money, suggested Bennett Weiner, chief operating officer of the BBB Wise Giving Alliance in Arlington, Va.

Ask the charity what will happen with the vehicle. Charities may use donated cars for its own work, say, delivering meals to homebound individuals, or give vehicles to clients in need, Weiner said. More often, though, cars are auctioned off at wholesale prices or sold for parts.

Some charities are licensed to sell donated cars, while others hire an outside company to do the job.

If your vehicle is to be sold, find out how much of the proceeds will go to the charity. This can vary widely from charity to charity, and in some cases can be a lot less than donors expect, experts said.

For example, in one case tracked by the GAO, a 2001 donation of a 1983 GMC Jimmy truck sold at auction for $375. The charity hired an outside agent to handle the sale. Once the agent deducted expenses plus its share, the charity ended up with $31. The taxpayer, meanwhile, claimed a $2,400 charitable deduction.

"For some households, this gift might be the single largest gift the family makes to any charity over the year," Weiner said. All the more reason to make sure the vehicle is being donated to an organization where it will do the most good, he said.

Once you have decided on a charity, the donation process is usually simple.

Schmidt's case is typical. The kidney foundation sent him paperwork to fill out, including the mileage on the 10-year-old Toyota. He returned that along with the car's title, which was transferred to the charity. A few days later, he received a call telling him when his car would be picked up. Before it was towed, Schmidt took off the tags. He turned them in to the Motor Vehicle Administration, and then canceled insurance coverage on the car. Shortly thereafter, the foundation sent a receipt to Schmidt.

State laws generally require that the title be transferred to the charity, just as if the vehicle were being sold to another person. Beware of nonprofits that suggest leaving the new ownership line blank, experts warned.

Sometimes charities don't transfer titles as promised. Donors might make this unhappy discovery when confronted with parking tickets or worse violations involving a car they donated long ago. They then must prove they donated the vehicle, experts said.

To claim a vehicle donation deduction, donors must file an itemized tax return. Also, donors can deduct only the vehicle's fair market value, or what it would sell for in the marketplace given the year, model and condition. Charities leave it to donors to decide the value. The IRS is concerned that some taxpayers over-inflate deductions.

If you expect to take a deduction of more than $5,000, you must get an independent appraisal of the vehicle.

For smaller deductions, experts advise looking at newspaper classified ads for the price of similar used cars.

Others recommend using car guides, such as the Kelley Blue Book, as a starting point. For example, if the blue book value of your car in good condition is, say, $2,000, but mechanics say the car needs $700 in repairs to bring it up to good condition, then the fair market value is $1,300.

Keep documentation, such as photos and receipts, to support your deduction claim, experts advised. Those claiming a deduction for more than $500 must also file a tax Form 8283.

Using an online used car guide, Schmidt found the value of his donated car is $2,500 based on its condition. As in the other times he donated a car, Schmidt said he will claim a lower deduction than the guide suggested, making sure he stays on the safe side of the IRS.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose @baltsun.com.

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