When trying to get rid of a used car, most people will either trade it in to a dealership or sell it themselves. But donating your car can make you feel good, and deliver a nice tax refund, too. Here are some guidelines to help make sure you get the tax break you want.
Pick Your Charity Carefully
The first step is verifying that the charity you select is qualified to receive tax-deductible contributions, meaning it’s recognized by the Internal Revenue Service (IRS) as a 501(c)(3) organization. You can find out whether your charity of choice is eligible by referencing the Exempt Organization Select Check online.
Note that churches, synagogues, temples, and mosques do not need to apply to the IRS to be qualified organizations. To determine if a religious organization is qualified to take tax-deductible contributions, you can call the IRS Customer Account Services division for Tax Exempt and Government Entities at (877) 829-5500.
Occasionally, organizations specializing in accepting donated vehicles warrant additional research. Charitywatch.org is one resource for individuals unsure about donating to these organizations. Some states have ordered charities to be more transparent with their advertising, and in some cases charities have been found to mislead donors and to be too closely tied with for-profit vendors.
Determine the Fair Market Value
The IRS defines fair market value as “the price a willing buyer would pay and a willing seller would accept for the car, when neither party is compelled to buy or sell, and both parties have reasonable knowledge of the relevant facts.” In this case, neither the buyer nor the seller can be an auto dealer. And the relevant facts are important—the IRS tightened its rules in 2005 and is now more stringent about assessing value based on details like condition, mileage, location, and trim level. For more details on figuring out the value of your car, see IRS Publication 561, Determining the Value of Donated Property.
Itemize Your Deductions Correctly
Knowing what you can and cannot deduct and how to itemize your deductions on Schedule A of Form 1040 can be confusing—you may need to consult a tax professional. In the meantime, here are three things you should know:
The entire value of the donated car cannot be deducted. Instead, you can deduct a percentage of its value that varies depending on your tax bracket.
If you donate your car to a charity that sells it in order to use the proceeds, your deduction will be based on the amount of money the charity receives from the sale which may differ from the fair market value you estimated. In addition, if the charity spends money on preparing your car for sale (for example, towing or auctioning), that can also lower the amount you can deduct.
Other limitations also apply. For instance, your deduction can’t exceed more than 50 percent of your adjusted gross income. Publication 526, Charitable Contributions, provides information on claiming deductions.
Keep Detailed Records
Finally, you’ll want to keep careful records regarding your tax-deductible vehicle donation, no matter how much the vehicle is worth or what organization you use.
For deductions of less than $250, you’ll need the name and address of the charity, the date of the donation, the location where you donated your vehicle, and a description of the vehicle (not including value).
For deductions between $250-500, you’ll want all of the above plus a written acknowledgement from the charity that states one of the following: No goods or services were provided by the charity in return for the contribution; a description and good-faith estimate of the value of goods or services, if any, that the charity provided in return for the contribution; or a statement that goods or services that the charity provided in return for the contribution consisted entirely of intangible religious benefits.
For deductions between $500-$5,000, you’ll want all the above documentation, and you will have to fill out Form 8283, Section A, on your tax return.
For deductions greater than $5,000, you must fill out Form 8283, Section B, and get a written appraisal from a qualified appraiser.
The Bottom Line
Donating your car to charity is a sure way to make you feel good, but if you want to receive a tax benefit, you’ll need to follow the guidelines outlined in this article. Consult a tax professional, do your research, complete the paperwork, file it away and prepare to enjoy a nice deduction on tax day.