How are car donations different from cash donations?

The overall benefits of a typical car donation are much less than from donating the same value of cash.

Make a cash donation by sending a $1,000 check to a charity. It’s a pretty efficient way for you to support the charity’s work, in terms of overall benefits.

  • Your cost: Your donation costs you $1,000.
  • The charity’s benefit: It gains your $1,000. You’ve provided $1,000 to help cover the charity’s program, administration and fundraising costs.
  • The overall benefit ($0 break even): The charity’s benefit of $1,000 minus your cost of $1,000.
  • If you itemize deductions at 30% (positive $300): If you are in a 30% marginal tax bracket, you get a tax benefit of $300 (your $1,000 times 30%). So the donation produces a positive $300 overall benefit (the charity’s benefit of $1,000, minus your cost of $1,000, plus the $300 value of your tax deduction).

In the typical car donation where you donate your car with a $1,000 private party sale value, you have to consider both the sales haircut and the dealer percentage.

  • Your donated car will be sold for the charity by a commercial dealer.
  • It will be sold at auction or for scrap, at a price around its trade-in value. This is less than its private sale value. The difference is the sales haircut.
  • The commercial dealer will charge for its services by keeping at least a portion of the sales proceeds (often 50% or higher). This is the dealer percentage.
  • Your cost: Your donation costs you $1,000 (the private sale value of your car).
  • The charity’s benefit: After the sales haircut and dealer percentage, it gains the remaining proceeds. If the sales haircut is 20% and the dealer percentage is 50%, the remaining proceeds are $400 ($1,000 minus $200 sales haircut minus $400 dealer percentage).
  • The overall benefit (negative $600): Following along with the example, the charity’s benefit of $400 minus your cost of $1,000.
  • If you itemize deductions at 30% (negative $360): If you are in a 30% marginal tax bracket, you get a tax benefit of $240 (the car’s actual sales price of $800 times 30%). So the donation produces a negative $360 overall benefit (the charity’s benefit of $400, minus your cost of $1,000, plus the $240 value of your tax deduction).

If, however, the charity will use your donated car directly in its programs, your $1,000 private sale value car produces the same overall benefits as a cash donation.

  • Your car will not be sold, but will be used directly by the charity.
  • Your cost: Your donation costs you $1,000 (the private sale value of your car).
  • The charity’s benefit: It gains the $1,000 value of your car.
  • The overall benefit ($0 break even): The charity’s benefit of $1,000 minus your cost of $1,000.
  • If you itemize deductions at 30% (positive $300): If you are in a 30% marginal tax bracket, you get a tax benefit of $300 (the car’s private party sale value times 30%). So the donation produces a positive $300 overall benefit (the charity’s benefit of $1,000, minus your cost of $1,000, plus the $300 value of your tax deduction).

Summarizing the above

Approach Overall Benefits
Before Taxes
Overall Benefits
With 30% Tax Rate
Donate $1,000 cash $0 (break even) plus $300
Donate $1,000 car, charity sells minus $600 minus $360
Donate $1,000 car, charity uses in its programs $0 (break even) plus $300

Posted in: Car Donations