Car Donations Not Charitable at Tax Time

Tax preparer Janet Ball has a pet peeve: those ubiquitous radio and newspaper ads soliciting car donations for charities.

The problem, she says, is that none of the charities make it clear that the tax break they tout is worthless to people who don’t itemize their deductions. That includes some of the low-income clients who take the standard deduction and whose returns Ball prepares as an enrolled agent for H&R; Block.

“I’ve got clients who get very upset when they find out they can’t use the deduction,” Ball said. Charities “are supposed to be helping people who have trouble making ends meet; instead, they end up taking a source of income from the people who can ill afford it.”

Ball isn’t the only one looking askance at the booming business in vehicle donations. Critics say the charities’ advertisements sometimes encourage taxpayers who can qualify for the tax break--those who itemize their deductions on Schedule A--to take larger deductions for the donations than the tax code allows. Some of the ads imply that it makes more financial sense to donate a car than to sell it, which is never true.

Meanwhile, most of the money raised goes to the car dealers that repair and sell the cars, with charities receiving as little as $100 a car. And sometimes, no money at all goes to good works, such as a case in Sacramento in which a man was convicted last week of setting up a phony used-car charity.

Charities defend legitimate vehicle donation programs as convenient for the donor and an effective fund-raiser for their causes.

Southern California chapters of the American Red Cross were among the first to accept used-car donations and to date have reaped $5.5 million from gift vehicles, said Nancy Kindelan, program manager and chief executive of the charity’s greater Long Beach chapter. The program has grown from raising $10,000 a month when it started in 1995 to more than $200,000 a month this year, with about 400 cars processed each month, Kindelan said.

The Red Cross contracts with a Van Nuys auto dealer, Donated Property Systems, that picks up, refurbishes and sells the vehicles. The charity collects 40% of the proceeds.

Kindelan acknowledges that charities would get more money if the donors instead sold the cars themselves and donated the proceeds. But many donors are sold on the convenience of the service, as well as the feeling that they are doing a good deed, she said.

“The attraction is just getting it out of the driveway without the hassle of trying to sell it and having strangers coming to your door,” Kindelan said.

The price of that convenience can be high, however, particularly for taxpayers in lower brackets. (See sidebar.)

The Red Cross does not attempt to set a value on a car unless it is expected to exceed $5,000, when IRS rules require an independent appraisal. Instead, the charity uses the Kelley Blue Book auto guide to provide donors with a high and low value for their make and model. It is up to the donor to determine how much to deduct, Kindelan said.

“How aggressive one wants to be on a tax return is a very personal decision,” Kindelan said.

Tax law says deductions for noncash contributions such as vehicles, household items and clothing cannot exceed the property’s fair market value--defined as the price a willing buyer would pay a willing seller when neither one is under any pressure to buy or sell.

Finding the fair market value is no easy task, however.

Take the example of a single car: a 1989 Honda Accord LX Sedan with standard features. Kelley Blue Book lists the price at $5,780 on its Web site, saying that is the starting point at which most dealers will begin to negotiate for a car in good condition.

Edmunds Publications values the car much lower, saying the market price at which the car is actually likely to be sold is closer to $3,690. Recent prices for a similar car in Auto Trader, a national car advertiser, ranged from $2,600 “or best offer” for a high-mileage version to $4,995 for a vehicle being offered by a dealership, with most sellers listing prices from $3,400 to $3,800.

Taxpayers should be prepared to back up whatever price they use for a deduction with photographs of the car, advertisements for similar cars and price guide quotes, tax preparers said.

Eva Rosenberg, an Encino enrolled agent and author of an online newsletter called “Tax Mama,” says she tells her clients to use the low end of the Blue Book value if the car has high mileage or other problems, and the higher value if it runs well, has low miles and special features. She requires them to document the value with a receipt and a photograph of the car.

“I have the client clean up the car and take a good picture of it in its best light,” Rosenberg said. “Then I attach the charity receipt, the Blue Book valuation they provide and an explanation of how we arrived at the amount.”

Valuing a car too highly could result in extra taxes and interest in an audit, while being too conservative can mean wasting a deduction, Rosenberg said.

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Liz Pulliam can be reached at liz.pulliam@latimes.com.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Charity’s Cost

Donating a car--or anything else--to charity might sound like a smart financial move. Usually, it’s not. Some points to note:

* Although some charities’ ads imply otherwise, you cannot deduct on your taxes more than a donated vehicle is worth. You must use the vehicle’s fair market value--what a willing buyer would pay a willing seller when neither is under any pressure to buy or sell.

* You can never be better off financially by donating a vehicle rather than selling it and keeping the money, unless you grossly (and illegally) overvalue the donation.

* Whether the convenience of donating a car is worth more than the hassle of selling it depends on how you value your time.

Is It Worth Donating a Vehicle to Save Time?

Here’s a guide to deciding whether it is worth selling a car yourself or donating it to charity, assuming you value your time at the same price your employer does. If you enjoy selling cars, of course, you would be more likely to accept a lower return for your time; if you hate selling cars, you would be more likely in insist on a higher return. The following examples divide taxable income by 2,080 yearly work hours for a rough estimate of the value of the taxpayers’ time. In all examples, taxpayers are married filing jointly and itemize their deductions. (Charitable donations cannot be deducted by taxpayers who take the standard deduction.) Also, combined federal and state tax brackets are slightly less than the two brackets totaled because state taxes are deductible on federal tax returns.

The car: 1989 Honda Accord LX Sedan, with standard features.

Fair market value: $3,690*

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Taxable Federal State Combined Tax income tax rate tax rate rate savings Hours** $25,000 15% 4% 18.4% $678.96 250 65,000 28 8 33.76 1,245.74 78 120,000 31 9.3 37.4 1,380.69 40 300,000 39.6 9.3 45.2 1,668.52

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* Edmund Publications

** Time spent selling a car that would make donation more cost effective.