Personal finance Q&A: Donating

Question: I want to donate my car to a nonprofit. How do I make sure my donation goes to a worthy charity?

Answer: You’ve probably seen scores of advertisements by companies promising to take that old clunker off your hands, help a charitable cause and reward you with a tax break — all with one easy phone call.

Some of the ads even promise a bonus cash reward or other perks for your donation.

In fact, donating a car to a nonprofit organization can be a good deal for you and a worthy charity. But it’s necessary to do some research to ensure that the bulk of your donation goes into the right hands.

The vast majority of car donation advertisements are promoting for-profit companies that serve as middlemen between donors and charitable organizations.

In most cases, those companies will sell your car, pocket a big chunk of the returns and only pass on a smaller fraction to the nonprofit.

“If you go directly through the charity, they’re going to get far more money than if you deal with one of these charity car middlemen,” said Trent Stamp, president of Charity Navigator, an organization that evaluates nonprofit organizations.

As interest in car donations has ballooned, many charities have put their own programs in place to accept vehicles. If your preferred charity is not equipped to take a car donation, broaden your search to other groups with a similar mission.

Don’t forget that for the most part, only donations to organizations defined as charitable under section 501(c)(3) of the Internal Revenue Code are tax deductible.

If it’s necessary to go through a middleman, find out what percentage of your donation will go to charity and shop around for the best deal.

Also, if your car is running, Charity Navigator suggests dropping it off with the charity yourself to save the organization from paying for towing costs.

Of course, another incentive for donating your car is the tax deduction, but don’t expect a windfall from your old lemon.

Before 2005, rules for taking tax deductions were more lax and the potential tax benefits were greater. As the popularity of car donations increased, so did the instances of fraud and abuse. One common problem resulted from donors inflating the value of their cars and taking inappropriately large deductions.

“Everybody thought it was a win-win except for the U.S. Treasury,” Stamp said.

In 2005, the Internal Revenue Service rules were tightened to prevent donors from inflating their deductions. Under the new rules, your deduction depends on what the charity does with the vehicle. If the charity sells the car, which is typically the case, you cannot take a deduction larger than the gross proceeds of the sale.

There are a few exceptions. For example, you may base your deduction on the vehicle’s fair market value if the charity sells it to a needy individual at a discounted price or if the charity uses the car as part of its mission instead of selling it.

If the claimed deduction is $500 or less, the IRS will also allow you to deduct the car’s fair market value.

Maggie Doedtman, manager of tax advice delivery for H&R Block, said donors should not be discouraged by the new rules. She said the key to avoiding IRS scrutiny is to get full documentation of your donation, including a 1098-C form, from the charity. The paperwork should state the gross proceeds of the sale or indicate if one of the exceptions apply.

“You want to continue to be charitable,” Doedtman said, “but you do want to make sure you have the documentation to support your donation.”

Associated press