Car donation for tax write-off?

November 1, 2008 by · 5 Comments
Filed under: Blog 

I'm an independent contractor in need of some tax write-offs. It was suggested to me by an accountant that I purchase a car for a few hundred dollars, and then sometime during the year, donate it to a specific charity (a local church) that offers a minimum $1,000 tax write-off for car donations.

In other words- buy a car for $500, use it as a tax write-off for $1,000.

Is this legal? I'm all for tax write-offs, but I don't believe in being dishonest with my taxes.

Thank you in advance!

First of all, no, it doesn't work like that. Second of all, even if it did, it would likely cost you money, not save you money.

1) Until a few years ago, you used to be able to deduct the fair market value of a donated car. Then Congress changed the rules to eliminate a lot of the fraud that was taking place. Now, unless the charity you donate the car to intends to keep the car and use it for its charitable purpose (in which case you can still deduct the FMV), you can only deduct the amount the charity actually sells the car for (they have to provide you with a statement telling you this amount after they sell it). So, in the latter case, they obviously aren't going to sell the car that you bought for $500 for $1000 — unless you got some amazing deal when you bought it. Since they will probably sell it at a wholesale auction, you'll be lucky if they get $300 for it, which is all you could deduct. On the other hand, even if the charity intends to keep and use your donated car, you can only deduct the FMV. What is the FMV? It is the price a buyer would be willing to pay for the car on the open market. If you just bought the car for $500, that is a pretty good indication that the FMV is $500. And that would be your donation.

2) Even if, by some miracle, you could deduct $1000 for that car that you just bought for $500, you would still lose money on the deal. Why? Because a tax deduction is not "deducted" from the amount of tax that you owe (that is what a "tax credit" is). Rather, a deduction is deducted from your income, before the amount of tax is calculated. The actual cash value to you of a deduction is the deduction multiplied by your tax bracket. For example, let's say that you are in the 25% tax bracket (for a single person, that would mean taxable income — after all of your deductions and exemptions — between $31,851 and $77,100; for a maried couple filing jointly, taxable income between $63,701 and $128,500). A $1000 deduction only lowers your federal tax bill by $250. So you would wind up $250 in the hole after paying $500 for the car. Even if you are in a state with a high state income tax rate of 10%, you would still be in the hole $150. Your combined federal and state tax rate would have to exceed 50% for your example to save you any money at all, which is pretty much impossible since the top federal rate is 35% (for income exceeding $349,701), and I don't think any state's top rate is 15%.

Incidentally, as an indpendant contractor, you can deduct a lot of things as business expenses (depending on what your business is). You should talk to an accountant about this (rather than car donation schemes).

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