The tow-away tax break: why car donation programs benefit everyone but the charities they're intended to help.

• Author: Cabot, Tyler

PERHAPS YOU'VE SEEN THE FLYERS or heard the ads on the radio: Donate your used car to charity and we'll arrive at your home, arrange the title transfer, and tow away your old clunker, giving the proceeds to your favorite charity. Over the past few years, hundreds of popular charities have launched such programs as a way to raise money, including the Red Cross, MADD, Big Brothers/Big Sisters, Easter Seals, and the United Way. To most people, it sounds like a great deal. Getting rid of an old car is a hassle. Giving it to charity, on the other hand, leaves you with a warm feeling--and a nice tax deduction, too, since the government allows those who donate a used car to deduct its full "fair-market value." So it's no surprise that car donation drives are increasingly popular, especially with civic-minded upper-middleclass types. Who ever said coddled yuppies don't have hearts?

Unfortunately, there's a catch, though you're unlikely to hear about it from television ads, phone operators, or tow-truck drivers. Just because Uncle Sam gives you a $1,000 tax deduction for donating your car doesn't mean that Easter Seals will receive a check in the same amount. The problem with car donation programs is that most of the benefits accrue not to the charity, but to the person who donates a car. So popular are these programs that I didn't have to look far for an example to demonstrate how badly they're flawed. In early March, the editor-in-chief of this magazine, Paul Glastris, bid farewell to his broken-down 1991 Volkswagen Jetta, and donated it to the good folks at the American Cancer Society. Like millions of Americans, Paul liked the idea of helping a charity, and didn't mind the tax break, either. The Jetta was, he admits, "undrivable." It had a burned-out engine, more rust that Michael Jordan's knees, and "what you might call `ever-expanding head and leg room'--the interior molding was perpetually disintegrating onto the passengers and driver," he told me. Paul's mechanic told him that the car was junk.

So he picked up the phone, dialed the American Cancer Society's "Cars for a Cure" program, and arranged for a pickup. Shortly after, he received a receipt listing the car's mileage (80,000) but saying nothing of its woeful condition or estimated worth. (Under federal law, tax deductions are do-it-yourself.) Paul followed the charity's instructions to visit either the Kelley Blue Book or the National Automobile Dealers Association (NADA) Web sites to determine the fair-market value of a '91 Jetta, which in turn determines the size of his tax deduction (for people in the 28-percent tax bracket it's about one-third the value of the car). NADA offers a three-tiered system--High, Medium, Low--to determine the quality and value of a used car. Even a car that rates "low" must be able to pass local inspection standards and run safely. But the giver is the sole determinant of the car's value, so there's nothing stopping Paul, or anyone else, from claiming the low estimate ($2,475), the medium one ($3,425), or even the high one ($4,150). For Paul, that corresponds to a tax break of anywhere from about $700 to about $1,200.

So how close are these figures to the actual value of Paul's dilapidated Jetta? There's no category for "heap of junk," so to find out just what price his car might fetch, I called Insurance Auto Auction, the company that will auction Paul's car. (For cost and convenience, most used cars aren't resold to customers, but auctioned for scrap.) They estimated that a '91 Jetta in the condition described would bring about $100 to $200. In other words, Paul stands to receive a tax deduction...