A Car Donation Could Help With Your Taxes
You can only deduct a vehicle's fair market value on your tax return under very specific conditions. | December 5, 2013 | iStockphoto
It's easy to donate a car to charity if all you want to do is get rid of it. Simply call a charity that accepts old vehicles, and it will tow your heap away.
If you want to maximize the benefits for both the charity and yourself, however, it's more complicated. Until 2005, it was easy for taxpayers to deduct the entire "fair market value" of a donated vehicle from their taxable income, reducing the taxes they'd have to pay to the Internal Revenue Service. (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.")
Allowing taxpayers to deduct the full fair market value for all those donated vehicles cost the IRS a lot of dollars, however, so the agency tightened the rules. Today, you can only deduct a vehicle's fair market value under very specific conditions. We're going to walk you through those conditions, with the usual proviso that you should discuss these issues with your tax preparer before you act. Also note that if your state or locality also levies income taxes, other rules may also apply.
You Must Itemize Your ReturnIf you want to claim fair market value for your car donation to reduce your federal income taxes, you must itemize deductions, says Twila D. Midwood, an enrolled agent based in Rockledge, Florida. An
enrolled agent is a tax expert who can represent clients before the IRS.
If you've always filed 1040EZ tax returns and you plan to keep filing them, you won't be able to deduct any amount for the car donation. You can file a regular 1040 tax form and itemize, even if the donated auto is your only deduction. That's usually not the best choice, however, unless you like paying a lot more taxes to the IRS than you must.
"For tax purposes, because a donation is a deduction from your income, the tax benefit relates to your tax bracket," Midwood says. "It's not a dollar-for-dollar item."
Here's the math: Suppose you are in the 28 percent tax bracket. Your donated car's value, and thus the deduction, is $1,000. "The $1,000 deduction will save you $280," Midwood says. If you're in the 15 percent tax bracket and you donate a car worth $1,000, it will only reduce your taxes by $150.
If instead you take the standard deduction, which in 2012 was $5,950 for a single individual or $11,900 for a married couple filing together, you save thousands of dollars over filing an itemized return only for the purposes of detailing your car donation.
The only way that donating a car nets you any tax benefit is if you have many deductions, and if their total sum, including the car, exceeds your standard deduction.
The Charity Must Qualify
Your city councilman's campaign organization and your hobby club may be nonprofit organizations, but donating a car to them won't give you any tax benefits. Only "qualified" charities can provide those for you. A qualified charity is one that has been approved by the IRS as an "exempt-status" or 501(c)(3) organization, Midwood says. Most organizations will state in their advertising or receipts that they're a 501(c)(3) if indeed they are one, she says. "If you're not sure, ask."
Religious organizations are a special case. They do count as qualified organizations, but they aren't required to file for 501(c)(3) status.
You also can call an IRS toll-free number: (877) 829-5500. If you do this, you'll have to listen to some recorded information about tax forms that probably don't apply to you. You'll then be given the option to "Press 2" to talk to a customer service rep about exempt organizations. Note that the waits can be quite long: up to 30 minutes.
You can always donate as much as you want to charities, but the IRS limits how much you can claim on your tax return. "Charitable donations can't exceed 50 percent of your gross income," Midwood says.
How To Deduct Fair Market Value
These are the four IRS rules under which you can get the maximum deduction (the fair market value) of a donated car:
1. When a charity auctions your car for $500 or less, you can claim either the fair market value or $500, whichever is less.
2. When the charity intends to make a "significant intervening use of the vehicle." This means the charity will use the car in its work, such as delivering meals to needy people.
3. When the charity intends to make a "material improvement" to the vehicle, which is "anything that increases the car's value and prolongs its life," Midwood says. "It can't be a minor repair or maintenance; it must be something like fixing the engine or systems that run the car," she says.
4. 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.
How To Determine Fair Market Value
To recap, 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. Neither the buyer nor the seller can be an auto dealer. Both must be private parties.
Edmunds.com makes it easy to determine your vehicle's
fair market value. And, as Midwood says, your assessment has to be "an apples-to-apples comparison."
IRS Publication 4303 explains this in more detail: "If you use a vehicle pricing guide to determine fair market value, be sure that the sales price listed is for a vehicle that is the same make, model and year, sold in the same condition, and with the same or substantially similar options or accessories as your vehicle."
Here's an example: Let's say your car is a 2003 Honda Accord DX sedan (the lowest trim level). It has 200,000 miles and it's in "average" condition. Edmunds estimates it would be worth $1,862 in a private-party sale in Southern California. You can't instead claim the $5,318 private-party value of a Honda Accord EX sedan (a much higher trim level) with 100,000 miles in "clean condition" (a condition grade that's one step up from "average").
Getting Fair Market Value Is RareIt's not realistic to expect that your car will meet one of the most stringent fair market value requirements. Take it from
1-800-Charity Cars, which says it is the largest car donation charity in the United States. It picks up donated vehicles from across the country and gives as many of the cars as possible to people who need transportation. According to the charity, few donated cars are suitable to give to the people it serves.
"If 5 percent go to our clients, I'm thrilled," says CEO Brian Menzies. "Although we take any car, about one-third go straight to salvage, i.e., junk." The rest are auctioned and the proceeds go to the charity of the donor's choice, he says.
The point that Menzies is making is this: Unless your car is in good or excellent condition, it will most likely be sold at auction or to an auto salvage yard. In that case, your deduction is based on the car's selling price, not your fair market value estimate.
Note that this price is not something you'll know when you donate the vehicle. "An organization has up to three years to sell the vehicle," Midwood says. "If they sell the vehicle within three years, they must notify the IRS and the donor."
If the April tax deadline is approaching and the charity still hasn't sent you a notification of your vehicle's sale, such as an acknowledgement, receipt or form 1098-C, you have two options.
Paperwork Is ImportantAccording to
IRS Publication 526, the first option is to file Form 4868 to request an automatic six-month extension of time to submit your return. Your second option is to file the return on time without claiming the deduction for the qualified vehicle. When the charity finally sends your notification, you can file an amended return using form 1040X to claim the deduction. You'll have to attach a copy of the notification to your 1040X.
Getting tax benefits for a donated car requires a lot of documentation, whether the car is junked, sold at auction or given to a charity's client.
IRS Publication 4303 has all the details. One tip: Keep all the papers or electronic files. You'll need them at tax time.
Another Approach to Car "Donation"
Besides giving your car directly to a charity, there is another way your vehicle can help a charity and also maximize your tax benefits: You can sell the vehicle yourself and donate the proceeds.
"If the qualified organization is going to sell the vehicle in order to receive cash, then it would make sense for an individual to sell the vehicle to a private party to maximize the amount of cash proceeds," Midwood says.
"Privately selling the vehicle might generate larger cash proceeds than if the organization were to sell the vehicle, she says. "The donor would then make a cash contribution to the organization."
Selling any car can be a hassle and selling one that's on its last legs poses challenges of its own. How you proceed depends on your goal. Are you focused on getting rid of a junker with minimum effort and you'd look at the tax deduction as a nice bonus? Then donating your car makes good sense.
If your goal is to maximize your tax deduction, carefully review the steps here and then make your decision. Whatever you decide to do, parting with your old car could help a nonprofit carry out its mission. And it also might make room in your garage for a new car.
