Ever wonder whether donating your car is the smartest approach?
Radio, TV, newspaper, Internet, email — the opportunities roll in. It seems like hardly a day goes by without being offered another chance to make a charity car donation.
Sure, it will take the car off your hands, and you avoid that hassle. But does a charity car donation produce the greatest combined benefit for you and the charity?
Spoiler alert*: In the case study below selling a $2,662 valued car and donating 70% of the proceeds would produce $1,407 greater overall benefits to the charity and donor compared to donating the car to the charity.
A test case – it’s about Nellie
Let’s make Patty’s treasured 1999 Jeep Grand Cherokee Laredo (aka “Nellie”) the test case. Not that Patty (my wife) is likely to part with Nellie any time soon.
We’ll test two approaches,
- #1 donate Nellie to a charity
- #2 sell Nellie and donate proceeds to a charity
Test case assumptions
Car’s condition: Nellie has a lot of the optional equipment upgrades and has pretty low mileage. But also has a bunch of dings and the transmission has a slow leak.
What would the charity do with the donated car: The charity would sell or have the car sold. That’s what typically happens. If we could find a charity that would use the car directly in its programs, that would produce greater benefits.
Marginal tax rate: 20%. If you itemize deductions on your Federal income tax return, you get a charitable deduction tied to the value of your donation. The value of your deduction is the amount of the deduction times your marginal tax rate.
- If you don’t itemized deductions, you get no tax benefit from donating your car (or anything else) to charity.
Handling haircut: 50%. Most charities use commercial dealers to run their vehicle donation programs. The dealer charges for its services (reducing the amount of sales proceeds going to the charity). I call this the handling haircut.
- This is a key factor – the smaller the handling haircut, the more the charity receives. Handling haircuts are regularly 50% or more of the trade-in value of the car. I have, however, seen a dealer advertise a 20% handling haircut.
Hassle cost: $300. Selling a used car can be a hassle – consider the time, energy and money spent to advertise, show the vehicle to potential buyers, negotiate a price and do the paperwork, not to mention concerns about safety and the out-of-pocket costs involved in the transfer. I call this the hassle cost. If you sell your used car yourself, you’ll bear the hassle cost. If you give your used car to charity and they handle almost everything, you’ll avoid the hassle cost.
Donating sales proceeds: 70%. Instead of donating Nellie, we sell it instead in a private sale. And live with the hassle. We still want to help a charity, so we’ll donate proceeds. We hold onto 30% of the sales proceeds.
Test case results*
Compared to donating Nellie to a charity, selling Nellie and donating proceeds would produce greater overall benefits for us and the charity.
#1 donate Nellie to a charity
- Charity benefit equals $949 (Nellie is sold at the $1,897 trade-in value, and then the dealer’s handling haircut takes 50%).
- Our benefit equals a negative $2,283 (we give up Nellie’s private sale value of $2,662 — we offset part of that with a tax deduction worth $379).
- It would cost us $2,283 to make a donation worth $949 to the charity. Total combined benefit equals negative $1,334.
#2 sell Nellie and donate proceeds
- Charity benefit equals $1,863 (we sell Nellie at $2,662 private sale value, and donate 70%).
- Our benefit equals a negative $1,791 (we give up Nellie’s private sale value, suffer the $300 hassle cost, donate $1,863, and we get a tax deduction worth $373).
- It would cost us $1,791 to make a donation worth $1,863 to the charity. Total combined benefit equals positive $73.
Compared to donating Nellie to a charity, selling Nellie and donating 70% of the proceeds would produce $1,407 greater overall benefits for us and the charity.
- Using the grading system at CarDonationCalculator.org (where a “C” is acceptable), donating the car to a charity which sells it gets an “F” grade, while selling and donating 70% of the proceeds gets a “C” grade.
- Using the same system, but donating 100% of the proceeds, gets a “B” grade.
- If we donated Nellie and the charity used it in its programs, we’d get the greatest overall benefits result, and an “A” grade.
If your sole motivation is disposing of your used car with as little hassle as possible, the donate the car approach is likely your answer. It might not, however, do much to benefit the charity.
If you want to produce the greatest overall benefits for yourself and the charity, you need to dig deeper. The best approach will depend on a combination of factors. Most important are
- the value of your car,
- what the charity will do with your car and
- whether you itemize deductions on your income taxes.
I think we all need to get smarter about this topic. I’m going to do more work on this.
What do you think?
Share your thoughts in the Reply/Comment section below. I’d love to hear from you, and so would others.
* Updated July 21, 2014
I’ve updated the calculator results, based on what we’ve learned creating the CarDonationCalculator.org website.