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How much will this be with taxes?

How much will I save in taxes by donating this item?

  • I've never really understood the economics of donating something valuable like a car for a tax write off. I am wondering what I will save in taxes by donating this item versus selling it. I'm having trouble calculating the exact value of the tax deduction to me... I know there are tons of caveats about which charity, the condition of the item, how to determine fair market value. Those are not my concern here. I'm struggling with the basic economics of making this donation versus trying to sell the item, and which will net me more. US federal income taxes here for the purposes of this question... Variables: 1) The item's fair market value is about $1K 2) I make about $130K 3) My assumption is that the deduction will help me save two ways: a. It will lower my taxable income by $1000, so I won't have to pay any taxes on that $1000. Let's say for the sake of argument that if my tax rate is 30%, I save $300. Cool. b. The more you make the higher the % tax you pay. So not only are those 1K dollars tax free, the other 129K are taxed at a slightly lower percentage. Let's say that moving me down the tax table by $1K takes my tax rate from 30% to 29.7%. That's another $387 I save by paying lower taxes on my other $129K, right? Great. So I'm up to $687 in savings on my $1000 item. Not bad. Donating is a lot easier than selling and it benefits the charity too, right? BUT here's the problem! Assumption b. seems to hold true as you look through the tax table on page 63 of the 1040 instructions [http://www.irs.gov/pub/irs-pdf/i1040.pdf]. The more you make, the higher % you pay. Pretty basic... However, once you reach the 100,000 mark, you're referred to a calculation table on page 75 that, for a single filer, says you basically just pay 28% flat for incomes 100,000-160,850. What's this? No more progressive tax over 100K? That's surprising to me. So basically if this is true, assumption a. will hold. Donating a $1000 dollar item means I will have $1K less income to pay taxes on. Cool. I save $280. But then assumption b. no longer holds. Lowering my taxable income does not budge my tax rate down. Because my % tax is the same whether I make $130K or $129K. So my only benefit comes from assumption a. And that means I'm getting rid of a $1000 item for $280. This is obviously far less appealing. Help me understand if I have all this right. What am I missing? Thank you Ask MeFi! P.S. I apologize if it seems like I make a lot of money and am quibbling over saving a little. Or if I don't seem very charitable as I contemplate this charitable donation. I'm just not getting all the logic on these tax deductible donations and want to understand what I'm giving up or gaining versus selling the item.

  • Answer:

    There are also ways to donate which are a little... dodgy, but have high payoff. For example, I heard an anecdote about someone who came into possession of something like 800 old engineering drawings. He (or she, or they, can't remember) wouldn't have been able to sell those for much - there were so many, but what he did was select just two or three of them - ie too few to saturate the market, and pull out all the stops to attempt to sell them for as high a price as possible (pay $$$ to professionally mount them, pay $$$ to put them in a gallery, pay salespeople $$$ to push them), and so managed to sell those 2-3 for $1000 sale-price each, not counting the $$$ used to obtain that sale. Then, those sales receipts were a proof that the drawings had a market value of $1000 each, so the remaining 800 drawings were donated, obtaining a $800,000 tax write-off, backed up by the proof of the receipts, even though there was no way he could ever have obtained anywhere near that amount by selling them (ie, using this approach, even making a net loss on the 2-3 sold due to marketing costs, could still reap large dividends). The charity probably onsold them for a few dollars each. Everyone is happy :-)

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You have a point, but there are a couple of other things to consider. First of all, if the car isn't your only deduction, then it, along with all your other deductions may well push you into a lower bracket. Also, donating can be a lot less hassle than selling, especially if the car is a beater.

TedW

I see you did mention my second point, but the first is still important to consider.

TedW

You should probably consult your tax preparer for specific advice on your specific situation. If you are doing the long form and doing expenses and deductions, then you can take that charitable deduction. It is not a dollar for dollar transaction. It doesn't factor in at all unless you itemize your return. Your accountant or a financial advisor will be able to look at all of your deductions and tell you exactly what your vehicle donation might be worth in terms of taxes and if it is better for you to donate or try and sell. A good accountant can give you other tips, too, so you might want to check out the services of a reputable one in your area.

45moore45

I just remembered reading something about making sure the charity signs over the title. It was a story about someone getting snagged on some insurance issue because their donated car was still showing up in their name long after they donated it-- just something to be aware of if you decide to donate.

45moore45

I agree with what has been said above, but will try to say it in a nicer way. The answer is, you are right, you would net more by selling the car. The charity knows this. They still want you to donate. Donating something is charity because it implies that you are making some sort of sacrifice. In this case you are sacrificing some (but not all b/c tax laws encourage donating) of the financial gain you could have earned from selling the car. The purpose of the tax laws is not to make donating to charity costless, but to make donating to charity have some benefit.

bove

b. The more you make the higher the % tax you pay. So not only are those 1K dollars tax free, the other 129K are taxed at a slightly lower percentage. Let's say that moving me down the tax table by $1K takes my tax rate from 30% to 29.7%. That's another $387 I save by paying lower taxes on my other $129K, right? Great. This isn't true. You can only count (a) or (b), not both. Your tax rate for the money you make at "the top" of your income is at a flat rate (let's say 30%); it only changes the average tax rate because it changes the proportion of money that's being taxed at each level. The correct way to think of the amount of taxes you owe is a segmented (but continuous) chart. You owe X% of the amount $A to $B, Y% of the amount from $B+1 to $C, Z% of the amount from $C+1 to $D, etc. The IRS publishes tables that break this down for you, but assume that if you're making over $100K you can just do the math on the last segment. In this case, you're taking money out of the topmost bracket, so you're reducing your tax liability by exactly (value of item) * (marginal rate at the top of your income). In this case you calculated it to be $387 or whatever. People ragging on you for considering the actual economics of this should suck it up and get the hell out of the thread.

0xFCAF

My boyfriend -- who by no means has a six-digit income -- donated an old beater of his last year. The tax deduction was nice and did make a little bit of a difference in terms of the refund he got, but the real savings for him was in the time and effort it would have taken to sell it (he's a contractor and commercial actor, and so would have lost time from work in order to get it smog checked, meet with prospective owners, etc.). The value you place on your own time may vary. And yeah, the primary point of charitable donations is not to net you a material benefit, so if you're looking at it from that perspective, of course the whole scenario is going to appear to come up short. If you look at it from the point of the tax deduction being secondary, the logic of the setup may be clearer. (Or, on preview, what bove said.)

scody

Another caveat -- there have been recent changes in the tax law so that you cannot necessarily deduct the fair market value of your beater. If the car is used by the charity you donate it to, then FMV is still the price. But if they sell it (probably for less than FMV), you only get to deduct the amount they actually sold it for. http://www.irs.gov/newsroom/article/0,,id=131660,00.html

katemonster

Assumption b is never ever true. When you are making $99,999 and find a buck on the street you don't pay more on the $99,999; you pay more on the $1, and your net income tax will be $.28 greater. The same thing works with deductions. If you are making $100,001 and come up with a way to write off $2 your tax goes down by only $.56. You can gain $280 from the donation, or ($1000-selling costs) knowing that selling may take up a substantial amount of time and effort.

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