The Tax Benefits of a Car Donation
Many charitable organizations will accept vehicles as donations. They will usually sell one as is, repair it and then sell it, or use it themselves. Most often, it does not have to be running for you to donate it, and many organizations will haul it off for you, free of charge, regardless of its condition.
There are many reasons to consider donating your vehicle — maybe you’re paying too much for insurance and registrations fees, maybe you’re losing money from all the repair needs, or the car has stopped running entirely and has become an eyesore. Donating your car can also save you the hassle of trying to sell it yourself, and it is tax deductible.
The tax deduction is a big reason why many car owners choose to donate, and if you’re thinking the same, it’s important to know that the process is simple, especially if your vehicle is worth $500 or less.
How to Donate a Car
Make sure that the charity you want to donate to can take vehicles. Not everyone has the facilities for it. Then check that it has an IRS 501(c) designation as a tax-exempt nonprofit. You can visit the IRS’ website to search their EO Select Check and see whether a charity is listed. This is important, because there are donation scams out there.
Once you’ve selected a charity and the donation is agreed upon, you can drop it off at whatever site they prefer, but most will pick it up from your location, whether it is running or not.
Check with your state’s DMV to determine their requirements for transfer of ownership. The paperwork and process will be the same whether you sell the car or donate it. Generally, you will sign the certificate of title, including an odometer reading, and fill out a bill of sale. Some of the details will be specific to your state. Also, remember to cancel your insurance right away, after the car changes hands.
If you plan to list it as a tax deduction, the IRS does require extra forms and paperwork from your donation, so make sure to keep everything.
The Tax Benefits
Tax incentives for charitable donations take two forms: deductions and credits. If you’re itemizing deductions on your income tax return, you can add them to the list. You will use Form 1040 to file — federal and state taxes are affected and a tax credit will lower your income liability. Only state and local governments offer tax credits for donations, so check to see whether you could benefit and how much.
Make sure that the sum of your itemized deductions will be higher than your standard deduction before donating a vehicle. Otherwise, you will end up claiming the standard deduction anyway, and there will be no financial gain from donating instead of selling it. Note that the IRS raised those figures at the beginning of 2018.
You cannot assume that the car’s listed fair market value is an appropriate deduction. The simplest scenario is when the car sells for $500 or less — then, the IRS says, you can claim the market value or $500, whichever is lower. All you need is a receipt from the charity, sans value, that includes their name and the car’s year, make and model, plus one of the following:
- A written statement that you received no goods or services in return.
- Good faith estimate of the value of goods or services, if any.
- A written statement that what you received were intangible religious benefits.
If your car is worth more than $500, you can only deduct what your vehicle is truly worth, given its condition at the time of donation, indicated by the selling price the organization gets when they sell it, minus repairs. After they have sold it, perhaps to a salvage yard or at auction, then they will provide you a receipt, and that will give you the value to claim.
You might be able to deduct the vehicle’s full market value, which is often higher than the price that charitable organizations sell for. For that, the IRS requires that one of three conditions be met, as follows:
- The organization itself uses the vehicle for its charity work.
- Before selling it, they make improvements to the vehicle that significantly increase its value.
- They donate or sell it at a discounted price to a low-income individual who needs transportation.
It’s important to check the exact process of donating a car and the forms you will need given your state and location. Publication 4303 is the IRS’ “Donor’s Guide to Vehicle Donation.” It will provide you more details about the federal tax benefits and how to qualify. It will also provide leads to your state offices.
There are several benefits you can gain from donating a vehicle to charity, both financial and personal. If you’re looking for more information, the IRS’ website and Charity Navigator are great sources to check out.