Thinking about donating your car? Its not always what you think!

Rather than go through the hassle of selling an old car, you may get a tax deduction for donating the vehicle to a charity. An increasing number of charities have turned to car-donation programs. You may have seen ads from some of these organizations in your local newspaper urging individuals to donate their old cars. The donation approach saves you the trouble of trying to sell the car.

In taking this approach, however, bear in mind that the amount of the deduction you will be allowed to claim is subject to special limitations. In many cases, the deduction you can claim is less than your view of the car’s value. If you compare the tax savings from a donation with a dealer’s trade-in offer, the offer may not seem as small.

For cars worth more than $500, the deduction will be the amount for which the charity actually sells the car, if it sells the car without materially improving it. This limit applies to any motor vehicle designed for road use, including vans and trucks, as well as to boats and airplanes.

Since most charities do sell the cars they receive, it’s likely that your donation will be limited to the actual sale price.

Furthermore, these sales are often at auction or in bulk and typically result in sales below “Blue Book” value. Also, you won’t know the amount of your deduction until the charity has sold the car and reported the sale proceeds to you (see below).

The charity must file Form 1098-C with the IRS for each car donated that is valued for more than $500. The charity is required to provide you with a copy which you attach to your tax return to claim the deduction.

Only if the charity uses the car in its operations or materially improves the car before selling it will your deduction be based on the car’s fair market value at the time of the donation.

In that case, fair market value is usually set according to the “Blue Book” listings for used cars published by the National Automobile Dealers Association. IRS will accept the value in the “Blue Book” or another established used car pricing guide if the guide lists a sales price for a car that is the same make, model, and year, sold in the same area, and in the same condition, as the car you donated.

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In some cases, this value will exceed the amount you could actually get on sale. If the claimed value for a car used by the charity is more than $5,000, an appraisal is required.

In any case, you must itemize your deductions to get the tax benefit; you can’t take a deduction for a car donation if you take the standard deduction. In addition to attaching Form 1098-C, you will need to complete Form 8283 for inclusion with your tax return.

You won’t be entitled to a charitable deduction unless you donate your car to an eligible charitable organization. In some cases, the transaction is more complex because private fund-raisers may be operating car donation programs on behalf of charities. This is legitimate as long as the private company is acting as the agent for a qualified charity.

If you donate your used car to charity, make sure you take the steps needed to substantiate your tax deduction.

If the charity sells the car, you will need a written acknowledgement from the charity containing your name and tax ID number, the vehicle ID number, a certification that it was sold at arm’s length to an unrelated party, the gross proceeds of sale, and statement that the deduction cannot exceed the proceeds. Form 1098-C provides this information. The charity should provide you with the 1098-C within 30 days of the sale.

If, instead, the charity will use (or materially improve) the car, the acknowledgement needs to certify the intended use (or improvement) and the intended duration of the use, along with a statement that the car will not be sold before completion of the use or improvement. In this case, the acknowledgement should be provided within 30 days of the donation. Again, Form 1098-C is used to satisfy this reporting requirement.

In some cases, this value will exceed the amount you could actually get on sale. If the claimed value for a car used by the charity is more than $5,000, an appraisal is required.

In any case, you must itemize your deductions to get the tax benefit; you can’t take a deduction for a car donation if you take the standard deduction. In addition to attaching Form 1098-C, you will need to complete Form 8283 for inclusion with your tax return.

You won’t be entitled to a charitable deduction unless you donate your car to an eligible charitable organization. In some cases, the transaction is more complex because private fund-raisers may be operating car donation programs on behalf of charities. This is legitimate as long as the private company is acting as the agent for a qualified charity.

If you donate your used car to charity, make sure you take the steps needed to substantiate your tax deduction.

If the charity sells the car, you will need a written acknowledgement from the charity containing your name and tax ID number, the vehicle ID number, a certification that it was sold at arm’s length to an unrelated party, the gross proceeds of sale, and statement that the deduction cannot exceed the proceeds. Form 1098-C provides this information. The charity should provide you with the 1098-C within 30 days of the sale.

If, instead, the charity will use (or materially improve) the car, the acknowledgement needs to certify the intended use (or improvement) and the intended duration of the use, along with a statement that the car will not be sold before completion of the use or improvement. In this case, the acknowledgement should be provided within 30 days of the donation. Again, Form 1098-C is used to satisfy this reporting requirement.

This entry was posted in All Service Providers, All Taxpayers, Business Deductions, Ever wonder, Gift, Have you ever asked, IRS Tips and tagged , , , , , , , . Bookmark the permalink.

1 Response to Thinking about donating your car? Its not always what you think!

  1. Pingback: Sean Wandrei, CPA » Blog Archive » Thinking about Donating your Car???

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