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Financial Planning / Tax Strategies
|Subject: Re: Donate Car for Tax or Sell?||Date: 9/11/2007 9:46 PM|
|Author: ptheland||Number: 95815 of 122562|
I was trying to figure out which of two options would make most sense from a financial standpoint?
OK. I'll admit up front that you've hit one of my pet peeves. So apologies in advance, as I'm probably going to get a bit riled up.
Based on the way you asked the question, this is a simple decision. But let's review quickly just so you can see why I say that.
What is the allowable deduction for a donated auto? Today, it is the "sales price" the charity gets for selling the car. I'll explain the quotation marks in a minute - that will be the ranting part.
Since the charity isn't going to take a lot of time and effort to sell the car, they basically sell them on the wholesale market. So as a quick approximation, they'll sell for roughly the trade-in value of the car. That becomes your tax deduction.
The deduction goes on your tax return, where is saves you taxes at approximately your marginal rate - give or take some various phaseouts.
So if you donate a car that the charity sells for $1000 and you're in the 25% tax bracket, you save $250 in taxes. The alternative is to sell it yourself for the $1000 and pocket that.
So, simply put, selling is always financially better than donating. Always.
Now, why is this a pet peeve of mine? It's the way that this all works in real life. There, you don't really give the car to the charity. There are car brokers who handle things for the charity. The broker is most definitely a for-profit business, so they aren't doing this work out of the goodness of their heart. They are doing this to make a buck. And they make lots of bucks.
Typically, these donation brokers charge the charity a flat fee plus a percentage of the sale price. On average, this works out to half or more of the sale price of the car. So your donation goes 1/2 to the charity and 1/2 to the broker.
Of course, some brokers are better than others. And some are worse. In California these are called Commercial Fundraisers. These fundraisers are required to make annual reports to the Attorney General's office on their fundraising activity. And these reports are available to the public on the internet. Here you go: http://justice.doj.ca.gov/cfr/cfr.asp . Enter a charity name to see the commercial fundraisers that the charity uses. Or if you know the name of a fundraiser, enter their name to see all the charities they raise money for.
If you want to have some fun, just enter the word "auto" or "automobile" or "car" into the name of the fundraiser and click on the Contains radio button. That will get you several fundraisers that work with cars. Take a look at the reports and see how much of the car's sale price ends up with the charity. You'll probably find some that are as bad as 10% or less.
What that tells me is that the big winner in all of this auto donation stuff is the fundraisers. Yes, the charity gets some money. But they only get a fraction of the value that was donated to them. The charities aren't going to raise a stink about this, as they still get something - and arguably more than they would get otherwise.
If you really want to help a charity and have an old car lying around, toss an ad in the paper with a low price and sell it yourself quickly. Then give the money to the charity. You are in exactly the same position - you get a charitable donation for the sale price of the car. But the charity gets a whole lot more money. The commercial fundraiser is cut out of the picture, and your buyer gets a better deal on the car than they would by buying after the car has gone through a couple of wholesalers.
The other thing to do is to ask your state attorney general (or whoever regulates commercial fundraisers in your state) to get involved and stop this abuse. Write your state legislators to set some standards for commercial fundraisers - if they can't get x% of the money to the charity, they need to be prohibited from raising money. Tell your friends and neighbors about this issue.
And whatever you do, please don't donate your car through a lousy commercial fundraiser. Research the fundraiser and find out how much of your car's sale price will actually end up with the charity.
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