When you deduct your car donation, you can save a considerable amount of income tax.
When you donate your car to charity, it can be a sweet deal for you and the charity you donate it to. The charity can choose to keep your car for their own use, donate it to someone in need, or they can sell it to get cash.
By deducting your car donation, you can save a considerable amount of income tax; but the IRS has added to the documentation requirements that you must comply with. If you want to ensure that the IRS does not question your tax deduction, you should follow their guidelines and be sure to keep all of the documents that verify your car donation.
Step 1 – Choose a Qualified charity.
Making sure that the charity you are donating your car to is an IRS tax-exempt organization is the most important step to being able to deduct the value of your car donation. Only car donations to these types of organizations can qualify for the deduction. Usually, such organizations include religious groups, charities and organizations that promote education, literacy, scientific, or humanitarian causes.
Step 2 – Appraise the value of the car you want to donate.
Check a used car guide resource like Kelley Blue Book to see what the fair market value of your car is. Look up the make, year and model of your car and use the value given by a private seller for your car’s overall condition. For instance, if the car’s body is dented, the A/C system doesn’t work, and the mileage is too high, it would be inappropriate to estimate the fair market value based on the price of a car that is in “excellent” condition.
Step 3 – Find out how the car will be used
Find out how the organization plans to use the car you want to donate. Assuming the car is going to be sold, IRS will limit the tax deduction to the sales price, even though the sales price is less than your estimated fair market value. Howbeit, if the car sells for $500 or less, you can claim a deduction of $500 or for the lesser of its fair market value.
If the charity intends to keep the car, you can deduct the appraised value you found on the Used Car Price Guide. Assuming that the value is over $5,000 and the organization is not selling the car, then you need to get a written appraisal before you can claim a deduction as required by the IRS.
Step 4 – Get documentation from the charity
Make sure you ask the charity you donate your car to for documentation. If the charity sells the car, the IRS regulations state that it must let you know the amount of the sale in 30 days, usually on a Form 1098-C. Regardless of whether they keep or sell the donated car, the organization is required to provide you with a written acknowledgement that serves as proof of the donation.
This document must include, at a minimum, your name and Social Security number, the donated vehicle identification number, date of donation, and a statement either listing all the goods and services you got in exchange for the donation or acknowledging that you didn’t get anything. If you have received anything of value from the organization, you will have to reduce your deduction by the value of what you received from the donation.
What you need
IRS Publication 78
Documentation from the charity
Your car donation is incomplete until you sign over the vehicle to the charity. This will also ensure that you will not be held responsible if the car collects traffic tickets.