Skip to comments.Donating a car won't be as good a deal after Jan. 1 (Donations to charities face tax crackdown)
Posted on 10/14/2004 11:58:39 AM PDT by churchillbuff
Pittsburgh radiologist William Poller was driving into work Wednesday contemplating what to do with his 1993 Subaru Impreza. He's ready to get rid of it, even though it's in "great shape."
"I was thinking: Should I put an ad in the paper or just call Goodwill?"
If he's going to call Goodwill, he'd better do it fast.
Tucked into the American Jobs Creation Act of 2004 - the big corporate tax-break bill that Congress passed this week - is a crackdown on a feel-good practice that has fast become one of America's favorite tax deductions: donating an old car to charity. The bill says that as of Jan. 1, you can take a tax deduction only for what a car sells for at auction after you give it to a charity. Under the old law, you could deduct what you could document as "fair market value."
The result of the change to taxpayers: The amount you can deduct is going to plummet. For instance, a $1,500 clunker likely will sell at auction for about $500. You'll get a letter from the charity after it sells telling you the price. There goes your fat deduction.
The only exception is a car you value at $500 or less. You can take that deduction without waiting for the charity's price.
Charities are in an uproar. They fear that more Americans will just sell their cars rather than donate them. And that could cost the charities millions of dollars in donations.
For Poller, the choice would be clear. "So if I was doing this on Jan. 2, Goodwill would be (out of luck)?" he asks.
Executives at the Volunteers of America, which employs 14,000 and serves 1.8 million Americans, are worried. VOA gets more than 80,000 donated cars a year and nets about $10 million. Although that's a small part of its total $711 million annual budget, those are unrestricted funds that VOA can use for anything.
Asked what he thinks of Congress' action this week, Ron Field, VOA vice president, lets out a long, sad sigh.
"It's just such a vital source of income ..." He pauses. "At a time when we're being pressed to do more ..." He sighs again. "We're a faith-based organization, and there just aren't enough resources to go around."
He estimates VOA will lose 40% to 50% of its revenue from car donations.
Asked the same question, Christine Nyirjesy Bragale, a spokeswoman for Goodwill Industries International, bitterly retorts: "You mean how Congress is using the homeless and hungry to pay for corporate tax breaks?"
Goodwill earns $12 million a year from car donations, which have become so popular that 106 of its agencies nationwide run car-donation programs. That's up from 20 to 30 just four years ago, she says.
Too much lost revenue
The government cracked down on donating cars to charities because when Americans take a deduction here and a deduction there, pretty soon you're talking real money.
Deductions for donating cars cost the government $654 million in 2000, according to a study last year by the Government Accountability Office, the governmental watchdog.
It found that an estimated 4,300 U.S. charities with annual revenue of $100,000 or more were operating car-donation programs. About 733,000 tax returns claimed the deduction.
Sen. Charles Grassley (news, bio, voting record), R-Iowa, author of the provision, said in a statement this week that he hopes the change will shut down "billions of dollars in tax shelters and shady tax practices."
He scolded charities that "seem to think it's all right for someone to cheat on his taxes to the tune of hundreds of dollars as long as the charity gets $50 out of it."
His office estimates the new law will add $2.4 billion in government revenue over the next 10 years.
Congressional hearings in June focused on alleged abuses by auto middlemen who auction the cars, take a big profit and send the rest to the charity.
The GAO studied the sale of 54 cars and found only 5% of their value ended up going to the charities.
The role of the middlemen
But the middlemen are sick of getting "a black eye" over the whole affair, says John Bierholm, chief operating officer of Donate For Charity in San Ramon, Calif. "The idea that the middleman is the evil, no-good party in the transaction is wrong. The misperception is that the middleman is the reason charities are receiving nothing for the cars."
What often happens, he says, is charities accept a car with little or no value, then get a middleman to sell it. He pays to have it towed, takes a little profit, and what's left is just a tiny bit for the charities. For cars with much higher value, the cut the middleman gets doesn't hurt as much, and the charity gets a lot more.
Charities take the clunkers for one reason, says Bierholm. "They don't want to create an uproar from people who say, 'Hey! I tried to donate a car, and they wouldn't take it.' " That can create bad will.
Bierholm thinks the new law will spur charities to be more careful about what middleman they contract with, because they all charge different fees. Grassley hopes that happens, too.
Other issues that could affect car donors:
Charities must send you a receipt showing what the car sold for at auction. But because 25% of taxpayers donate their cars in December for year-end tax planning, they may have to wait months to find out what the car sold for, says Field of VOA.
Taxpayers who have taken the deduction in the past may not be off the hook. If they padded the value of their car, that may come back to haunt them if they're audited. They'll have to prove the car's value.
Bierholm says he was initially worried that the new law would ruin his business. "I thought: 'Oh my God! Donations could drop by 50%.' Now I'm changing my tune."
That's because he realized that a surprising 60% of those donating cars that he auctions for charities don't itemize deductions on their tax returns. So they don't get the car-donation deduction anyway. They just give to the charity to avoid the hassle of selling a car themselves.
"They don't feel comfortable unloading (a car) to a private party, haggling over the price, having strangers come to their home to look at a car, paying for advertising and having an angry owner two days later when the car breaks down," he says.
Ray Nichols, chief executive of BSC America, which operates Bel Air Auto Auction in Bel Air, Md., thinks, "People who donate for genuine reasons will still donate for genuine reasons." Others, who were just after a tax break, may not.
Car owners are torn: They still want to give to charity. But if the car is worth enough, some say they'd rather just sell it.
The new law "is not a good thing," says Jeff Crump, a graphic designer from Richmond, Va. He already has donated three cars to Goodwill, and his dad gave one.
"Selling a car yourself is a real inconvenience. If I had a dead vehicle, I'd still give it to them. But if it had any value at all, I'd sell it."
That's just what charities don't want to hear.
DAMMIT! It doesn't cost the government ANYTHING - it's NOT their MONEY!
I buy cheap cars (under a grand) drive them for a few years and donate them. Since I have such a short commute, and can borrow a car from the company I work for, reliability isn't a huge problem.
I have donated my last 4 cars, and will probably not anymore without the deduction.
A tax increase on who?
This is the elimination of a scam. The tax rate remains the same.
Bully! This is the right thing to do.
Not if you don't donate vehicles to charity.
do you think this is spin designed to make bush look bad today after talking about the bill????
I don't think it was a scam. I donated my old car to charity back in 2002, got a blue book of $1200 on it and the charity probably got much more than that by sending it to a chop shop to sell its parts on the market. Everybody won there.
Now, thanks to this latest regulation, the charities are going to get less donations, taxpayers are left with one less tax break, and people are gonna be pissed off on both sides of the aisle. That ain't what I call a solution.
What did The President say?
Exactly. Look at the source. AP/Yahoo News. And the timing of this release smells. Why didn't this get brought to light by MSM when the bill was introduced? Might even be worth a Snopes look to see if it's legit.
If the charity sent it to a chop shop, they sold it to the chop shop. How much did the charity sell it for? You can't take the disassembled value of the car as your figure because there is a lot of labor cost and other costs associated with running the chop shop.
When the car sells, that is the market value of the car. To use another figure is dishonest. Starting next year, it will also be against the rules.
And you know this how precisely? What...you don't think chop shops ever do charitable stuff?
I've donated two old cars and the charity took the cars away both times without so much as a cursory examination of either. They valued the cars at way above the price I would get on the used car market and when it was said and done the 40% tax rebate I received was more than I would have gotten had I sold the cars without a bit of the hassle. I felt sort of dirty afterwards. It was legal, but it wasn't exactly right, I'm glad they are addressing it.
He said, "Why don't you just put a note on your return that says 'Please audit'?" was how he put it.
It's a scam. He asked me what I could reasonably sell it for. The answer was about a quarter of what the receipt said, and we went with that number.
Since when is donating something to charity to receive a tax break NOT a "genuine reason?"
If it is a cause I really believe in, I will donate regardless of the degree of government THEFT, but marginal ones are not going to receive any more benefit from me if I have to go through loads of red tape.
(And yes, I have donated decent vehicles before.)
If the chop shop donates it's services, it still does not change the market value of the car at the point it was donated. The chop shop is adding value to the vehicle by disassembling it, preparing the parts for resale and storing and marketing the parts. If they do this out of the kindness of their hearts, the chop shop has made a donation to the charity, not you. The value of the car you turned over is the value of a fully assembled car. For you to report the value of the car parted out is false, because that is not what you turned over to the charity.