The Bottom Line:

Car donation schemes introduce middlemen who demand a profit. Put more money in your own pocket and give more to your favorite charity by selling that old junker yourself.

The Hype

You’ve probably heard the radio ads: “Get rid of that junker in your driveway hassle-free and get a big tax deduction by donating it to charity. We’ll take your car, running or not, and handle all the paperwork.” Sounds too good to be true, and of course it is.

The Reality

First, a recent study shows that, after the overhead of middlemen who pick up, fix up, market, and do the paperwork, only 16% of the value of the car ends up in the hands of the charity.

Second, you probably won’t get as much of a tax deduction as you would like. Most people assume they can just deduct the high Bluebook value of the car. In fact, according to IRS rules, you can only deduct what the car will fetch in the open market, that is, what you would get if you sold it. Donating a car to charity is an invitation to a tax audit, so you need to get this right, and document it carefully, which leads to the final point.

Third, your donation is not really hassle-free since you need to carefully document the value of your car. If it really is a junker, it’s probably worth only a few hundred dollars scrap value. Otherwise, you need to honestly assess its condition and compare it to the prices on similar cars you find in for sale ads. But you can’t stop there. You need to write down the phone numbers in the ads, wait a while, and then call the sellers to find out the actual selling price. Unless you do this for 2 or 3 similar cars, you won’t have a leg to stand on when the IRS questions your return.

This just in: Beginning in tax year 2001, you also have to file a written appraisal with your tax return if you claim the value of your donated car is $5,000 or more. That will probably set you back $50 to $100.