The car donation processing business is extremely profitable, and as a result it has attracted a lot of advertising dollars, and also a lot of hype that is only tangentially true. Before you get to swayed by all the glitzy ad copy, here are some of the realities of car donations.
Myth number one: your car will go to a needy person.
Very few donated cars actually end up being given to needy people. Most of them — about 90% — end up at auction houses, where they are auctioned off to the highest bidder. The auction price is usually less than the Kelley Blue Book value of the car, and sometimes it is less than half of the book value. What’s more, the auctioneer will take a cut of the sales proceeds, sometimes as much as half, and so what the charity actually gets as a result of your donation may be only a very small fraction of the actual value of your car.
There are some charities that actually give donated cars to people, and other charities that may take cars on a case-by-case basis to help with their own programs, but they are harder to find, and you will have to be more careful about the tax processing documents and the title transfer. That’s because these charities aren’t as intimately familiar with car donation as the major car donation processors are. That doesn’t mean they don’t know what they’re doing, they just don’t do it as often or it on the same scale as the big car donation processing houses do. But if you are willing to look, you can find charities that will either use your car themselves or find a needy person to give it to. In those cases you will get a substantially larger tax deduction than you would if the car was sold at auction because in the case of an auction, you can only deduct the amount that the charity actually gets, not the car’s value. But if a charity uses the car or gives it to someone who needs it, then you can deduct the full “fair market value” of the car.
Myth number two: your car donation will help the charity in a big way.
While your car donation definitely will help the charity, if you really wanted to help them, it would be better if you sold the car yourself and gave them the proceeds of the sale. Again, this is because most donated cars are sold at auction, and auction prices are much lower than what a private buyer and seller would agree to.
Myth number three: you will get a huge tax deduction for donating your car.
The days of massive tax deductions for donated cars are over. This ended when the IRS laws for donating cars changed back in 2005. The average income tax deduction from a car donation is about $500. This is because most cars are sold at auction, but also because most donated cars aren’t terribly valuable to begin with. If your car is worth more than $500, or it sells at auction for more than $500, you can still get a larger tax deduction, but you will have to fill out extra paperwork, and you may want to have had the car appraised before you make the donation, and appraised by an IRS approved appraiser. You would want to do this in a situation where you were donating a very expensive car, perhaps if you were an antique car collector who wanted to thin out their collection.
As mentioned before, if you can find a charity that will either use your car themselves, give your car to a needy person, or make major improvements to your card before they sell it, then you see a much larger tax deduction. But still don’t expect your donation to wipe out your tax bill. You will be able to deduct roughly the Kelley Blue Book or “fair market value” of your car, but nothing more.