How to collect tax savings from donating a car
People who like to cut their tax bill and reduce clutter donate lots of things to charity. Used clothing and household items are popular items to give away this time of year. But if you'd like to donate a used car to charity, you'll need to know the special rules that apply.
First, if you want to get a tax benefit from donating a used car to a charity, make sure it's a "qualified charity," approved by the IRS and with "exempt status" or be a 501c(3) organization. Most charities' websites will say if they're qualified. If you're not sure, ask. Better yet, visit the IRS' list of exempt organizations.
How much can you claim as a deduction if you donate a used car? If you thought the market value would be a good place to start, you'd be wrong.
Until 2005, it was easy to claim the car's full market value as the amount of the charitable gift tax deduction. But the IRS looked into this and saw a lot of tax filers claiming big deductions for donated cars and charities getting significantly less when they sold the cars. So the IRS changed the rules.
Today, when you donate a car to charity, you can deduct the fair market value only under four very specific conditions. More on this in a minute.
For most other situations, you can deduct only the "selling price." This is the amount the charity receives when it sells the car to a salvage yard, at auction, etc., which is when the charity actually gets value for your donated car.
One problem is that in many cases, the selling price is less than the amount you might get if you sold the car yourself. Another problem is that the charity's selling price often isn't something you'll know when you donate the car. Sometimes it may take a few months for the charity to sell the car.
If you make the donation at year-end, and the charity doesn't sell it until the following May, you won't have the information by the time you need to file a tax return. In this case, you'll need to file for an extension.
In cases that take a longer time for the charity to sell the car (it has up to three years), you'll have to file your tax return without the charitable deduction. Once you get the selling price from the charity, you can go back and file an amended tax return to include the correct deduction.
Since the market value can often be more than the price the charity fetches, most people would rather claim the market value as their charitable deduction. These are the four specific conditions in which the IRS allows you to claim the maximum deduction (fair market value) of a donated car:
- When the charity auctions the car for $500 or less, you can claim the lesser of the fair market value or $500. So if the charity sells the car for $200 and the market value was $400, you can claim a deduction for $400.
- When the charity intends to make a "significant intervening use of the vehicle." If the charity uses the car instead of selling it, for reasons that relate to their mission (delivering meals, clothing, for transportation of volunteers, etc.), you can claim a deduction of the fair market value.
- When the charity makes a "material improvement" to the vehicle before selling it. An improvement is material when it increases the car's value and prolongs its life. This doesn't include minor repairs or maintenance.
- When the charity gives or sells the vehicle to a needy individual at a price significantly below fair market value, and the gift or sale is part of the charity's mission of helping the needy who need transportation.
If your donated vehicle meets one of these conditions, how do you find it's fair market value?
The IRS defines that as the price a willing buyer would pay and a willing seller would accept, when neither party is compelled to buy or sell and both parties have reasonable knowledge of the relevant facts. Neither can be an auto dealer; both must be private parties.
To make your life easier, you can use car-value services such as Edmunds.com or KBB.com to determine your car's fair market value. Just make sure you use a reasonable comparison, which includes the same year, make, model, options and condition.
In cases that the charity would simply sell the car to a salvage yard, selling the car privately and donating the cash proceeds can give you a bigger tax deduction. But remember, selling a used car, especially one on its last legs can be a hassle and create additional liability. If you want to get rid of a clunker quickly and with the least hassle, donating it makes sense.
Claiming a tax deduction for a donated car requires some special attention and some extra documentation. Check out IRS Publication 4303 for the details, and keep all paperwork from the donation.
