Donating a car can be good deal if it goes to the needy, not an auction

For years, giving a car to charity offered multiple benefits. You could get rid of your beater, help a worthy cause and pocket a sizable tax deduction.
There are still many charities that will happily haul away your 1987 Chrysler LeBaron, but a law that took effect last year has deflated the tax deduction. Now, most donors can deduct only the amount the charity receives when it sells the vehicle — which is usually much less than the amount claimed under the old rules.

Congress tightened the rule to prevent taxpayers from exaggerating the value of donated cars. The IRS expects you to base the fair market value on the price you would get if you sold your car. Depending on your car's condition, its fair market value may be considerably lower than the amount listed in used car pricing guides, such as the Kelley Blue Book.

A report by the Government Accountability Office found that many donated cars were sold at auction for a few hundred dollars — far less than the deductions that donors were claiming on their tax returns. And in many cases, most of the profits went to middlemen hired by charities to auction the cars.

But if your car is in good condition, you may still be eligible to claim the fair market value. Better yet, your donation could change someone's life.
Under a provision in the law, you can deduct the fair market value of a donated vehicle if the charity fixes it up and gives it to a low-income individual or sells it to a needy person at a low cost. Only a handful of charities operate these programs, and not all used cars meet their standards.

What you need to know

•The likelihood your car will be refurbished. Good News Mountaineer Garage in Charleston, W.Va., repairs about 70% of the cars it receives, says Barbara Bayes, director of the program. Other charities accept a much smaller percentage. Good News Garage, which has branches throughout New England, repairs about 25% of donated cars, says CEO Chris Hendrickson. The typical car provided to low-income clients is 10 to 12 years old and has about 100,000 miles on the odometer, Hendrickson says.

Brian Menzies, CEO of Charity Cars, says he recently approved the donation of a 1991 Mazda with 150,000 miles. "It's a well-maintained one-owner car, in perfect condition," he says. "It's still a valuable car."

On the other hand, charities can't perform miracles. "If you have an '87 Ford Escort with a blown motor, that's not something anybody is going to fix," Menzies says.

•What will happen to the car if it isn't refurbished. In most cases, the charity will simply sell the car at auction, which means your deduction will be limited to the proceeds from the sale.

•Whether the charity will tow your car, and the location of drop-off facilities. With the exception of Charity Cars, whichhas processing facilities all over the country, most charities that refurbish cars are local organizations (see box). Good News Mountaineer Garage, for example, will pick up cars within 100 miles of its offices, which exist throughout West Virginia.

If a charity refurbishes your car and provides it to a needy individual, you should receive an acknowledgement from the charity. You can use that document to deduct the fair market value of your vehicle on your tax return.

Charities that repair used cars say they can't keep up with demand for good used cars. Charity Cars expects to give away 1,000 cars this year, but it receives about 2,000 requests a month, Menzies says. Good News Mountaineer Garage, Bayes says, "could use gazillions more cars."

No tax break for underwear

This is also the time of year when many people clean out their closets. But before you take your old Chess King pants and angora sweaters to Goodwill, keep in mind that the IRS is scrutinizing these deductions, too.

Under a law enacted earlier this year, donations of clothing and household goods aren't deductible unless they're in good condition or better. The IRS hasn't issued guidelines yet on what constitutes "good" condition. A guideline, though, is to limit deductions to donated items that can be used for their original purpose, says Donna LeValley, tax attorney and contributing editor for tax guide publisher J.K. Lasser. Don't deduct donations of clothing that someone wouldn't wear, such as used undergarments and socks. The same goes for old household appliances that don't work.
Keep a list of the items you donated, along with other information, such as the brand names of the items, LeValley says. She also recommends taking photos of the donated items. That way, you'll be able to support your deductions if the IRS audits your return.

The Salvation Army's website provides useful guidelines on valuing frequently donated items. You can find it at www.satruck.com/valueguide.asp.