July 8, 2005
St. Paul, Minn. — Before this year, if you donated a car to a nonprofit agency, you determined its fair market value, and that was the figure that you deducted on your tax return. So you could have donated a 10-year-old car and claimed $3,500 on your return.
But now, you can deduct only what the charity receives for the sale of your car -- no matter what you think the vehicle's worth. That means that same 10-year-old car might only garner a $350 deduction.
In December 2004, before the new tax law went into effect, there was a rush on vehicle donations. Now those donations are far fewer. And that means fewer dollars for the charities that run vehicle donation programs.
"It's a critical source of revenue for Courage Center," says Rose Adams, director of the Courage Center's Cars for Courage program. The program is one of the largest car donation programs in Minnesota.
The sale of donated vehicles has helped generate more than $2 million a year for Courage Center programs. But Adams says the change in the tax law has led to a sharp drop in vehicle donations -- they're down nearly 50 percent from this time last year.
"If the trend continues, we're looking at a huge deficit for 2006. And it could be as high as a $1 million deficit to our operating budget," Adams says.
That could mean less money for Courage Center's theraputic, educational and other services.
Vehicle donations to Goodwill/Easter Seals are down, too. Goodwill used to receive so many cars that it ran two auctions a week. Now there's only one. Goodwill spokesman Brian Becker says he's not optimistic about a turnaround anytime soon.
"For the remainder of this fiscal year, we're not expecting to get back to where we were last year," says Becker. "We're hoping to close that gap, but revenues are down 25 percent from what they were last year."
The drop in vehicle donations is dramatic, but could have been predicted, says Rich Cowles, executive director of the Charities Review Council.
"There are a lot of people who make donations who are motivated partly by charity, but in many cases to get the tax deductions. And so if the deduction isn't as good as it used to be, it's not surprising to us that the interest in donating vehicles would decline," Cowles says.
Congress changed the law last year because some taxpayers were getting more benefits than the charities, by claiming inflated values for their donated vehicles.
A report last year by the federal Government Accountability Office says vehicle deductions showed up on more than 700,000 tax returns in 2000, the most recent year studied, costing the treasury an estimated $654 million.
The GAO also found that many of those deductions were inflated, and in some cases, the charities got only 5 percent or less of the value that donors claimed on their tax returns.
The goal of the new law is to get taxpayer deductions more in line with what charities actually receive for the cars. Rich Cowles of the Charities Review Council says it's unfortunate that some charities are suffering because of the change, but he says it's an improvement.
"Any of these changes end up hurting some people. But on balance I think it's one of the better kinds of changes," says Cowles. "It aligns philanthropic intent with the tax deduction, so that you only get the amount that benefits the charity. And that's what philanthropy should be about."
The only exceptions are for vehicles donated to nonprofits that use the car for their own purposes, for training, or to sell to people in need. Then taxpayers can deduct fair market value, rather than actual sale price.
But that doesn't help many of the dozens of organizations in Minnesota that have vehicle donation programs. So charities are now trying to figure out how to deal with the decrease in donated cars and the resulting drop in revenue.
So far, neither Goodwill nor Courage Center is at the point where they're cutting staff or services, but they're trying to come up with new ways to boost vehicle donations by boosting awareness of their programs -- and letting people know that the tax deduction for donated vehicles may not be what it used to be, but it's still there.