You’ve probably seen or heard ads urging you to donate your car
to charity. “Make a difference and receive tax savings,” one organization
states. But donating a vehicle may not result in a big tax deduction — or any
deduction at all.
Trade in, sell or donate?
Let’s say you’re buying a new car and want to get rid of your
old one. Among your options are trading in the vehicle to the dealer, selling
it yourself or donating it to charity.
If you donate, the tax deduction depends on whether you itemize
and what the charity does with the vehicle. For cars worth more than $500, the
deduction is the amount for which the charity actually sells the car, if it
sells without materially improving it. (This limit includes vans, trucks, boats
and airplanes.)
Because many charities wind up selling the cars they receive,
your donation will probably be limited to the sale price. Furthermore, these
sales are often at auction, or even salvage, and typically result in sales
below the Kelley Blue Book® value. To further complicate matters, you won’t
know the amount of your deduction until the charity sells the car and reports
the sale proceeds to you.
If the charity uses the car in its operations or materially
improves it before selling, your deduction will 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.
In these cases, the IRS will accept the Blue Book value or
another established used car pricing guide for a car that’s the same make,
model, and year, sold in the same area and in the same condition, as the car
you donated. In some cases, this value may exceed the amount you could get on a
sale.
However, if the car is in poor condition, needs substantial
repairs or is unsafe to drive, and the pricing guide only lists prices for cars
in average or better condition, the guide won’t set the car’s value for tax
purposes. Instead, you must establish the car’s market value by any reasonable
method. Many used car guides show how to adjust value for items such as
accessories or mileage.
You must itemize
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. Under the Tax Cuts and Jobs Act, fewer people are itemizing because
the law significantly increased the standard deduction amounts. So even if you
donate a car to charity, you may not get any tax benefit, because you don’t
have enough itemized deductions.
If you do donate a vehicle and itemize, be careful to
substantiate your deduction. Make sure the charity qualifies for tax
deductions. If it sells the car, you’ll need a written acknowledgment from the
organization with your name, tax ID number, vehicle ID number, gross proceeds
of sale and other information. The charity should provide you with this
acknowledgment within 30 days of the sale.
If, instead, the charity uses (or materially improves) the car,
the acknowledgment needs to certify the intended use (or improvement), along
with other information. This acknowledgment should be provided within 30 days
of the donation.
Consider all factors
Of course, a tax deduction isn’t the only reason for donating a
vehicle to charity. You may want to support a worthwhile organization. Or you
may like the convenience of having a charity pick up a car at your home on
short notice. But if you’re donating in order to claim a tax deduction, make
sure you understand all the ramifications. Contact us if you have questions.
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