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. But if you want to maximize your tax benefits, it’s more complicated. Here’s a walk through some of the considerations, with the usual proviso that you should discuss these issues with your tax preparer before you act.
YOU MUST ITEMIZE YOUR RETURN
If you want to claim a car donation to reduce your federal income taxes, you must itemize deductions. You could itemize even if the donated auto is your only deduction, but that’s usually not the best choice.
Here’s the math: Suppose you’re in the 28 percent tax bracket and the allowable deduction for the vehicle’s donation is $1,000. That will save you $280 in taxes. If you’re in the 15 percent tax bracket and you get that same $1,000 deduction, it will reduce your taxes by $150.
If the car donation is your only deduction, it’s likely that taking a standard deduction would save you thousands more dollars in taxes. The only way that donating a car nets you any tax benefit is if you have many deductions and if their total, including the car, exceeds the standard deduction.
THE CHARITY MUST QUALIFY
Only donations to qualified charities can provide a tax deduction for you. A qualified charity is one that is recognized by the IRS as a 501(c)(3) organization or a religious organization.
To help you determine whether a charity is qualified, the easiest thing to do is to use the IRS’ exempt organizations search tool or call the IRS toll-free number: 877-829-5500.
A KEY CONCEPT: FAIR MARKET VALUE
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.”
But under current IRS rules, you can only deduct a vehicle’s fair market value under very specific conditions:
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 “significant intervening use of the vehicle.” This means the charity will use the car in its work.
3. When the charity intends to make a “material improvement” to the vehicle, not just routine maintenance.
4. When the charity gives or sells the vehicle to a needy individual at a price significantly below fair market value.
HOW TO DETERMINE FAIR MARKET VALUE
Edmunds can help you determine your vehicle’s fair market value with its Appraise Your Car calculator. Enter the car’s year, make and model, as well as information such as trim level, mileage and condition, and get an accurate idea of what your vehicle is worth.
IRS Publication 4303 cautions: “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.”
GETTING FAIR MARKET VALUE IS RARE
It’s not realistic to expect that your car will meet one of the stringent fair market value requirements. Only about 5 percent of donated vehicles are suitable for use by charity recipients. About a third of them are simply junked, and the rest are auctioned off with the proceeds going to the charity of the donor’s choice.
So 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.
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 car yourself and donate the proceeds. By doing so, you might be able to generate more cash than if you let the charity sell it.
How you proceed depends on your goal. If you’re 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. But if your goal is to maximize your tax deduction, carefully review these steps, consult with your tax adviser and then make your decision.
EDMUNDS SAYS: Parting with your old vehicle could help a nonprofit carry out its mission and also might make room in your garage for a new car.
This story was provided to The Associated Press by the automotive website Edmunds . Peter Gareffa is a staff writer at Edmunds: Twitter @petergareffa.
— Edmunds: How to Research Your Car Donation http://edmu.in/2xfC1pn
— Edmunds: How Much Is My Car Worth? http://edmu.in/2fDmzsQ