Question: We are purchasing a new car and we have been debating whether or not it is better for us to donate our car, or just sell it. The Blue Book value is approximately $7,500 and we have not gotten any serious offers after advertising it for over a month. A local car dealer offered us $6,500. Does it make sense for us to donate the vehicle and get the write-off as an itemized deduction or just sell it?
Answer: Under old tax law, you were entitled to an itemized deduction in an amount equal to the fair market value of the car on the date of the contribution. The fair market value was defined as the amount a willing, unrelated buyer would pay for the car.
Obviously, the determination of the fair market value was subjective and open for wide interpretation. The “Blue Book” value had been widely used and accepted to “objectively” determine the fair market value. Often, the “Blue Book” value was greater than the realistic open market selling price and the greater the difference, the greater the tax advantage of donating your car.
However, the IRS has tightened the rules to limit the deduction to the charity’s actual selling price of the vehicle making the “fair market value” the actual market value! You should receive a Form 1098-C from your charity detailing the information required to take the deduction.
Now, back to your question:
Before donating your car, I recommend that you analyze the economics of the contribution versus the cash received if you sold the car. To do this, you need to multiply the deductible contribution amount by your combined federal and state marginal income tax rate and compare the result to what you would receive if you sold the car. This calculation will help you determine the financial consequences of your decision (tax savings vs. cash received from a sale).
Let’s assume that your federal and state marginal tax rate is 30% and the charity would sell your car for $6,500. A $6,500 deduction would save you $1,950 ($6,500 x 30%). Compare the $1,950 to the $6,500 cash the dealer would give you, and now you can make an educated decision. Economically, you will receive a benefit of 30% of the charity’s selling price of your vehicle compared to 100% of the selling price if you can sell it yourself.
Once educated with the financial consequences of donating your car, you can now weigh the dollars involved with the emotional and societal benefits of supporting the charitable organization.
Barry Dolowich is a certified public accountant and owner of a full-service accounting and tax practice with offices in Monterey. He can be reached at 831-372-7200. Please address any questions to Barry at PO Box 710 Monterey, CA 93942-0710 or email: [email protected].