Know More about Tax Deductions for Car Donations to Charity
Do you have an old car just sitting around that you have no use for? Did you know that donating your car to charity could mean significant tax savings, if you include it in your charitable contribution deduction?
With a systematic approach, you can maximize your tax deduction and tax savings with this donation. You can claim the tax deduction in a couple of ways, depending upon how the charity uses your donation – deductions for cars the charity sells are limited to fair price, but in all other cases, you can utilize the vehicle’s fair market value.
What are the tax benefits of a car donation?
When you donate an old car that you don’t need anymore to a charity, you become eligible for a tax donation. But in order to claim that deduction, you have to itemize on your income tax return. In 2005, the IRS changed the laws related to tax deductibility of car donations because of exaggerated deductions based on inflated book values. Under the new rules, the deductible amount of your vehicle donation is directly related to the selling price of your vehicle.
The receiving charity is required by IRS to send the donor a receipt or “contemporaneous written acknowledgement” within 30 days of the vehicle sale. This receipt must include the following:
- The gross selling price of the vehicle (if sold for greater than $500)
- Year, Make, Model and VIN Information
- A statement that the vehicle was sold at arm’s length between two unrelated parties
- A statement that no goods or services were received in return for your contribution.
Research on how much the charity sold the car for
The price obtained by the charity for selling your car is the amount of your deduction. For instance, if the charity sells off the vehicle at an auction for $3500, your deduction is limited to that amount, even if the fair market value is around $5000. But if the charity has sold off your car at a major discount to a needy person, or retains the vehicle for personal use, you can claim a deduction based on its fair market value.
If the charity sells your car sells for $500 or less, you can deduct $500 or your car’s fair market value, whichever is less. It generally doesn’t require extra paperwork. For instance, if your car is valued at $600 but sells for $400, you can still deduct $500. The sales price of your car is generally mentioned on Form 1098-C (the charity presents the report of the sales price on this form).
Find out the fair market value
To get a clear estimate regarding your car’s fair market value for the purpose of deduction, it is recommended you consult a reputable used-car price guide such as Kelley Blue Book. Look for private party prices for your car based on make, model, and overall condition.
Claim the deduction
Please bear in mind that you need to maintain correct documentation of your donation, in order to claim a deduction for the donated car. These are some of the paperwork required:
- Your full name
- Date of your donation.
- Vehicle Identification Number or VIN.
- Statement that describes any goods and services you received.
The amount of your deduction has to be reported on a Schedule A IRS form. Since you can claim a deduction, only if you itemize, the total of all your eligible expenses on Schedule A must exceed the standard deduction amount for your filing status.
If the deduction exceeds $500, you have to fill up Form 8283 or Form 1098-C. The latter form is specifically for motor vehicles, while the former is for general property, but you can use either to file for a car donation – take a look:
- Read and complete Section A if the deduction comes with the range of 501 and $5,000. Remember, you are listing it is a non-cash charitable contribution.
- If the deduction is more than $5000, you have to complete section B instead.
- After completion of section B, you have to get a written appraisal as well.
How to get your tax deduction?
Follow these simple steps:
- Always set up the car donation with an IRS registered 501(c)(3) charity. Unfortunately, there are several fraudulent ones out there that are looking to swindle you out of some cash. Many car donation companies that claim to support kids or the underprivileged are often deceiving well-intended donors with cute websites and jingles.
- Ensure the charity chosen by you is eligible to receive tax-deductible contributions. As mentioned, you can donate to any 501(c)(3) organizations, such as charitable, educational, or religious organizations.
- Depending upon the state you reside in, a title might be needed to complete the donation process. Find out about your state’s title laws beforehand.
- Don’t forget to request a receipt for the charity once the car donation is over. IRS rules require that all donors receive a charity receipt or IRS form 1098-C for their car donation. Hold onto the receipt for next year’s taxes.
- As mentioned, you can use either 8283 Form or 1098-c Form for claiming the deduction. Just attach it to your federal tax return.
- Since the tax deduction is most commonly limited to the selling price of the vehicle, you should select a charity wisely. They need to have a qualified and experienced automobile expert on board, who can help get the highest return possible to the charity.
Always consult your tax adviser or the IRS for more information about how you can claim charitable deductions. The IRS can answer your tax questions and can provide tax forms, publications, and other reading materials for further assistance. You can visit their website for more details too. All of this information and the process of claiming a tax deduction might seem a tad tedious, but a significant deduction makes it worth the effort. Moreover, you get rid of an old car and help a good cause – it is a win-win deal for sure!
What are you waiting for?! Let’s get started donating your vehicle and make a difference today!