Car Donations: Beware Scams and Tax Pitfalls

Last Updated Jun 21, 2010 1:08 PM EDT

Donate your car to charity and get a tax break. That popular radio and TV pitch seems enticing. But as the recently-announced car-donation investigation by New York Attorney General Andrew Cuomo shows, you need to watch out before giving up your car for a write-off. Otherwise, you might get scammed and could face serious tax pitfalls.

Cuomo, who is running for New York Governor, sued to shut down the car-donation charity, Feed the Hungry Inc. (not affliated with Feed the Hungry Inc. in Leesburg, Va., which provides assistance to the Phillipines.) He said the charity's director kept 98% of the funds for himself instead of spending it to feed the homeless.The charity has declined all comment through its lawyer.

If you want to donate your old car, take these steps to help ensure the proceeds go to good works and that you'll get a bona fide tax deduction:

Checking Out a Charity
Make sure the charity is legitimate. Check the online version of IRS Publication 78 to see that the group is a registered charity eligible to take such donations. Only organizations listed as having 501 (c) (3) status can. Additionally, you can check with your state attorney general's office, which keep files on charities in most states. Documents often are online.

Check how much goes to good works. Documents on file with the attorney general also should state what percentage of funds go to charitable work vs. running the charitable organization. Well-run charities typically spend 15% or less administering their program. You can also check the efficiency of the charitable organization with Charity Navigator.

Donate the car directly to the charity . Even legitimate charities may hire profit-making services to handle car-donation program. In such cases, these services get the majority of the money. So look for a charity that accepts the car directly.

Knowing The Write-off Rules
A few years back, the IRS became concerned that people were inflating the value of their auto donations. So a 2005 law made the rules tougher for deducting a car you donate. Here's how to qualify for the tax break:

Make sure the title is signed over to the charity. Any transfer to a for-profit service, even if it's working with the charity, could jeopardize your deduction.

Value your car correctly. Before the law changed, you could deduct the fair market value of your car calculated by a reputable service such as Kelley Blue Book. But now, if your car is worth more than $500, you generally can deduct only the amount the charity received when selling the car. You should get a statement from the charity showing the sales figure. If you don't get the statement within a month of the sale, call the charity and insist on getting it.

There's one exception to this valuation rule: When the charity decides to keep your car and use it--to deliver meals to the needy, for instance. Then, you can still deduct the fair market value from a valuation guide. But you'll need a statement from the charity confirming that it used the vehicle and for what purpose. Attach it to your tax return. Whatever the valuation, you'll need to file IRS form 8283 with your itemized return. The donation is considered a charitable deduction, but has its own form.

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    Jerry Edgerton, author of Car Shopping Made Easy, has been covering the car beat since Detroit companies dominated the U.S. market. The former car columnist for Money magazine and Washington correspondent for Business Week, Edgerton specializes in finding the best deals on wheels and offering advice on making your car last.