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Tax advantages of donating a car

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How to donate your car and get a tax deduction

You may not be surprised that some scammers are prepared to siphon off money from charitable car donations. But you might be shocked that there seems to be a small industry dedicated to doing just that.

These unscrupulous operators leave the charity -- and more importantly its needy beneficiaries -- worse off. But they can also act against your interests by reducing or eliminating the tax deduction to which you're due.

This article arms you with the information you need to avoid these scams. To protect yourself and those who need your generosity, read on.

Why donate your old vehicle?

In addition to the satisfaction you get from making a charitable donation and helping those in need, there are usually two reasons why you might want to give your old car or truck away:

  • It isn't (or is hardly) running, and you just want to get rid of it. A charity might come and tow it away for you.
  • You want to avoid the hassle of selling it, and your resulting tax deduction takes some of the sting out of not getting its full market value.

Why do scammers scam?

Obviously, scammers are in it for the money. But how do they benefit?

Well, there are a number of ways. They can, for instance:

  • Be intermediaries (middlemen or middlewomen) who deduct outrageously high expenses and pass on only a tiny percentage of the vehicle's value to legitimate charities
  • More rarely, be a fake charity, and keep all the proceeds for themselves
  • Be fronts for car auction houses, whose primary goal is to increase their fees, commissions, turnovers and profits

It's worth remembering that people bidding at a car auction know they are going to have to normally pay commission on top of the bid price. So they bid lower, with the total they are going to have to pay in mind.

That means an auction house may truthfully report the winning bid without that reflecting the money it’s taken out of the deal, because the buyer would have paid more if commission wasn't going to be levied. In addition, the seller pays commission, too.

How do you spot a car donation scam?

Often, the first sign someone's trying to scam you is that the person approaches you -- rather than the other way around. This isn't a surefire indicator, because some legitimate charities might scan local papers and websites for small ads for low-value car sales and then contact the seller. But it should raise a red flag.

Alex Brodrick, President and CEO of Volunteers of America Michigan, suggests:

  • If someone asks you to donate your vehicle, ask that person if he or she works directly for the charity being represented. Questionable vehicle donation programs often accept donations on behalf of other groups and pass along only a small fraction of the proceeds.
  • Beware if a vehicle donation program is vague about the programs it supports, or where the programs are offered.
  • Before you donate, ask what percentage of your donation goes to helping people. At Volunteers of America, for instance, an average of 88 percent of donations go directly to locally run programs, such as homeless shelters and support for veterans. There is no middleman.

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How to avoid being scammed when donating your car

A recommended strategy for avoiding scams is to go local. "We recommend that donors look for human service charities where they live and contact them directly to see if they can take their car donation," says Sandra Miniutti, a vice president at Charity Navigator, a non-profit organization that helps people vet donation seekers.

Broderick concurs, advising, "Look for local impact first." And, scams prevention expert Justin Lavelle, a chief officer of BeenVerified, echoes this advice.  “It makes sense because you can visit the charity,” he says, “and meet its people and discover more about its work and operations.”

Lavelle also agrees with the others over additional homework you should do, and recommends you:

  • Check with your local Better Business Bureau to make sure the charity you're looking to donate with is reputable.
  • Request the charity's 501(c)(3) letter granted by the IRS [see below], the incorporation document from the Secretary of State's office in the state where the nonprofit is operating, and the corporation bylaws for accepting vehicles as donations ahead of time.
  • Look for preprinted forms, uniforms, and a branded tow vehicle before you sign over the title.

As you are going to discover below, the charity's 501(c)(3) status with the IRS is essential for two reasons:

  • Without it, you can't claim your tax deduction.
  • A charity without that status may not legally be a charity at all. True, it might still be a good cause, but your suspicions should be aroused.

If you're in any doubt, you can check whether the organization is qualified with 501(c)(3) status by calling the IRS toll-free on (877) 829-5500, or by using the IRS 501(c)(3) look-up tool at its website.

What to do when you hand over your vehicle

One way to save your charity money is to simply drive your car or truck to its premises, eliminating the cost of collection. Of course, that only works if the vehicle's running well, and you've chosen a local good cause.

If you opt for collection from your home, you have a last chance to weigh up the legitimacy of the organization to which you're donating. If you become suspicious during that process, don't hesitate to call the whole thing off.

However, don't expect the driver or tow truck to carry the charity's branding. Most contract out the work of picking up vehicles to third-party specialists, and those may also be responsible for subsequently disposing of it.

However, it's a good sign if the specialist towing company appears reputable, with branding on the tow truck and driver's uniform, and properly prepared paperwork.

Don't pay fees

"Legitimate vehicle donations should be straightforward and simple, with absolutely no charges -- no towing fees or paperwork fees, for example," says Broderick. And he says Volunteers of America often completes donations within 24 hours of a call offering one, though other (and particularly smaller) charities may take longer.

Preparation and paperwork

Before parting with it, remove the license plate(s) from your vehicle, along with any garage door opener, cellphone equipment and satellite navigation device that wasn't factory-fitted. You should also cancel any extended warranty insurance that's still operative.

Most importantly, always sign the title before handing it and the car over, and then take copies of both sides of the document. You just have to sign and print your name. Lavelle of BeenVerified says your signature is crucial to the process.

An open title means the donor is responsible for registration and licensing fees until the title has been properly closed with the charity being the recipient, says Lavelle. Fraudsters will try and convince the donor to leave the title unsigned. With an open car title, the individual can sell the car to another person or to a used-car dealer for cash.

If the person collecting the car pressures you to leave the title blank, you should regard that as a major warning sign that you're likely dealing with a scammer.

Ask the driver for a temporary receipt for the vehicle, and make sure the charity mails you an official receipt within a reasonable period.

What are the tax advantages of car donations?

If you usually take a standard deduction:

For some, there are no tax breaks for donating a vehicle. That's because to qualify you must itemize deductions in Schedule A of your IRS form 1040. If you just take the standard deduction, you can't claim for your donation.

Few taxpayers will benefit if they claim only for a car donation. If you decide to itemize just for the year you make such a donation, you should claim for everything else you can deduct. That's because you'll lose your standard deduction, which was $6,300 for individuals in 2015 and '16, and $9,300 for heads of households in 2016.

And that itemizing means keeping receipts and more form filling. Whether you think that's worthwhile is likely to depend on the value of the vehicle you donate and the total you can claim for other deductions.

If you already itemize:

Of course, if you already itemize your deductions, that question doesn't arise. However, you still have to observe certain IRS rules, which are numerous and include:

  • Caps on the total you can deduct in any one year ($154,950-$309,900 in 2015, depending on your marital and other status).
  • The eligibility of the charity to which you are donating, which would usually be a "qualified organization" with 501(c)(3) registration.
  • If the charity sells the vehicle, you can usually only deduct the gross proceeds -- not the vehicle's fair market value.
  • If the charity significantly improves the car, or keeps and uses it for a period for its charitable purposes, you may be able to claim the car's fair market value on donation.

You must obtain and retain certain paperwork -- more on that below.

Broderick of Volunteers of America provides some other helpful guidance. He says, speaking very generally, if your vehicle is 14 years old or newer, and is sold by the charity, your deduction is limited to the gross proceeds the charity receives from its sale. Otherwise, if the value of your vehicle is up to $500, the IRS states that it is up to the donor to determine the value. In rare cases, when a vehicle is worth more than $5,000, the donor may opt for a certified appraisal to determine fair market value.

If you want more information -- especially on the circumstance in which you can deduct the fair market value rather than the gross proceeds of the sale -- download "A Donor's Guide to Vehicle Donation" (publication 4302) from IRS.gov.

What paperwork do you need to support your deduction?

The IRS says that you must have a written acknowledgement from the charity if you're deducting more than $500, and that acknowledgement must include:

  • Your name and taxpayer identification number
  • The vehicle identification number (VIN)
  • The date of the contribution

Also, according to the IRS, that acknowledgement must additionally include one of the following, but there can be other requirements that are described in "A Donor's Guide to Vehicle Donation":

  • A statement from the charity that it didn't provide you with any goods or services in return for the donation.
  • If the charity did provide you with such goods and services, it must describe them and provide a good faith estimate of their value.
  • A statement that those goods or services entirely comprised "intangible religious benefits, if that was the case."

Lavelle adds, "The receipt needs a date, the amount, the address of the place you're donating the car, and a phone number of the contact person. If the IRS audits you, you'll be asked for this information."

And the IRS warns, "If the acknowledgment does not contain all required information, the deduction may not exceed $500."

None of this should be a problem for a legitimate charity, which is likely to have boilerplate receipts/acknowledgements sitting on its IT systems. It can simply pick the appropriate one, fill out the relevant fields with your and your vehicle's details, press print and drop the document in the mail to you.

What to do if you're the victim of a car donation scam

If you realize you're being scammed before you sign over the title and part with the car, you can just tell the scammers to get lost. But, particularly if you haven't done your homework, you may not recognize you've been a victim until the IRS rejects your deduction, or your receipt/acknowledgement from the charity shows it's received only a tiny fraction of your vehicle's value.

Most scams skate around the extreme edges of the law, but don't actually cross into illegality. And you're likely to get the satisfaction of seeing your scammers in a criminal court only if you've been a victim of outright fraud. As Miniutti of Charity Navigator explains, “There are outright bogus charities. But more often, it is simply a matter of a ‘legitimate’ operation but with little money getting to an actual charitable cause. That's why it is better to go directly to a local charity.”

Still, whether or not you completed the donation, if you've had a bad experience that falls short of criminal fraud, you can still report the intermediary to the office of your state's attorney general. If your beef is with the charity itself, your state should have a charity regulator to whom you can tell your story. Those regulators are usually part of your state's attorney general's or secretary of state's departments.

Don't be put off by scammers

It's bad enough that unscrupulous people are siphoning off money from good causes to line their own pockets. But it would be even worse if their activities put off good folks like you from donating their cars to charities.

So don't let the scammers deter you. Follow the advice above, and you can make a difference -- and get your appropriate deduction.

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