Donate Used Cars to Charity or Cash for Clunkers?

Before President Obama’s Car Allowance Rebate System (A.K.A. “Cash for Clunkers“) program, people typically had two choices of what to do with their clunker: Trade it in at the dealer for a couple hundred bucks, or donate it to charity for a tax write off. Now, buyers have a third option: trade it in for up to $4,500 tax credit. Well, just because the cash for clunkers program has come along, doesn’t mean it’s a no brainer to choose that option.

Here’s a break down of when each option may be the right choice:

Cash for Clunkers:

Qualified consumers will receive a credit of $3,500 or $4,500 for an eligible trade-in toward the purchase of lease of an approved vehicle under CARS Program. Here’s how to qualify:

• The vehicle must be less than 25 years old when you trade it in.
• You must buy or lease a new vehicles (buying another used car does not count).
• Your trade-in vehicle must get 18 or less MPG.
• Trade-in vehicles must be registered and insured continuously for the full year preceding the trade-in.
• Program runs through Nov 1, 2009 or when the funds are exhausted, whichever comes first.

Typical trade-in:

Here’s how a typical trade-in usually works.

• Dealer provides a fair market value for the vehicle.
• This trade-in value is usually subtracted from the total cost of the new purchase.
• Trade-in value may be subtracted from a new or used car purchase.

Donation to Charity:

It used to be that you could write off the fair market value of your clunker on your taxes, but that changed in 2005. Since the 2005 changes, here are the restrictions:

• For cars valued at more than $500, the deduction is limited to the amount the charity sells the car for at auction.
• You must attach a statement of sale to your tax return when claiming the deduction.
• Charity must be a qualified 501(c)(3) charity
• your deduction cannot exceed 50% of your adjusted gross income.
• For cars valued less than $500, you may claim a deduction for the lesser of the vehicle­’s fair market value on the date of the contribution, or $500, provided you get a written acknowledgment fromthe charity that complies with the requirements describedunder Written Acknowledgment For a VehicleContribution Deduction of $500 or Less.

Which is The best choice?

Cash for Clunks is best if:

• Your trade-in has a fuel economy of less than 18 mpg
• You’re looking to buy or lease a new car in the next month or two
• Your trade-in is valued at less than $4,500.

Typical trade-in is best if:

• You’re looking to buy after November
• Your trade-in has gets better than 18 mpg
• You’re looking to buy a used car.
• Your trade-in has a fair market value of over $4,500

Donation to charity if:

• Your trade-in is valued at close to $500 (the charity probably won’t get much more than this at auction)
• You’re buying a used car
• Your trade-in is over 25 years old

Related Posts:

• The Typical American Family Can’t Afford The Typical New Car!
• My Lessons on Buying a Car.