Tax Benefits of Donating Used Vehicles to Charity

Donating a used car or other vehicle to charity is a great way to support the nonprofit of your choice, while also allowing you to claim a deduction on your federal income tax return. But because the rules governing vehicle donations have tightened in recent years, it is important to be aware of the process involved in donating a car and the procedures that must be followed when claiming the deduction.

Many charities both large and small now accept vehicle donations. The types of vehicles that qualify for the tax deduction include all privately-owned automobiles manufactured primarily for use on public roads, as well as boats and airplanes. In order to claim a deduction, however, the charity that receives the gift must be recognized by the Internal Revenue Service (IRS) as a 501(c)(3) organization. Available online and at most public libraries, IRS Publication 78 includes an annually updated list of qualified charities.

Prior to a change in the rules in 2005, taxpayers were permitted to write off the fair market value of the donated vehicle. But under current law, you are only allowed to deduct automatically the good faith fair market value of the car if the estimated amount does not exceed $500.

The IRS defines fair market value as the price a willing buyer would pay and a willing seller would accept for the vehicle when neither party is compelled to buy or sell and both parties have reasonable knowledge of the relevant facts. When assessing the value of the vehicle, use a pricing guide that takes into account make, model, year, options and accessories, as well as the condition of the car.

If the value of the vehicle is assessed at between $500 and $5,000, the size of the deduction depends upon what happens to the vehicle after the charity has received it. If the organization sells the car, your deduction is limited to the exact amount of the sale price. Different rules apply, however, if the charity makes what the IRS calls “significant intervening use” of the vehicle before it is sold or otherwise disposed of. If, for example, a donated car with a fair market value of $1,500 is used by the charity for several months for pickups and deliveries before it is sold at auction for $1,200, the donor would nonetheless be permitted to claim a deduction of $1,500.

The donor may also claim the fair market value, rather than the sale price, if the charity sold the car to a “needy individual” at much lower price than the actual value or if the organization makes a “material improvement”—generally, reconditioning work that is more than routine or cosmetic—before selling the vehicle. If, however, the vehicle is ultimately sold for less than $500, the taxpayer may claim a deduction for the lesser of the vehicle’s fair market value on the date of the contribution or $500.

Keep in mind that writing off your car donation is only possible if you itemize your deductions. To claim a vehicle deduction above $500, the receiving charity must provide you with a written acknowledgement of receipt that includes detailed information about the intended use and sale of the vehicle. The charity is required to provide you with substantiation of the donation within 30 days of the date when you signed over the automobile or, if the car is sold, within 30 days of the sale. A copy of the receipt must be filed with the tax return, along with IRS Form 8283, “Noncash Charitable Contributions.” If the vehicle is worth more than $5,000, you must also attach documentation from a qualified appraiser. If the donated car is worth between $250 and $500, you should obtain a written acknowledgement of the contribution from the charity for your records, but you are not required to attach the acknowledgement to your tax return.

When donating a vehicle, steer clear of for-profit intermediaries that advertise offers to help you manage your charitable donation, as these middlemen often keep the bulk of the proceeds from the sales of donated cars. If possible, give the vehicle to a charity with a car donation program that enables them to accept the vehicles directly. You should also consider avoiding charities that do not allow you to re-title the car when turning it over to them, as this opens you up to liability.

 

 

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