Taking the Car Donation Tax Deduction - Three Easy Steps

Taking the car donation tax deduction isn't quite as easy as it once used to be, but that doesn't mean that the benefits of making a car donation are gone - in the form of a tax break for you, the taxpayer, and in the form of much needed funds for your favorite charity. The IRS car donation rules changed beginning with the 2005 tax year. In prior years, taxpayers were able to deduct the Fair Market Value (FMV) of a car donated to charity. In theory, FMV is 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 relevant facts. In more practical terms, the FMV could be found using a car pricing guide, such as Edmund's, making reasonable adjustments for the options and condition of your car.

Unfortunately, the IRS found out through their tax return audit programs that way to many taxpayers claimed a much car more "generous" car donation tax deduction than what the donated cars actually sold for, i.e., the taxpayers got higher tax benefit than what actually benefitted the charities. So they changed the car donation law. Beginning with the 2005 tax year, taxpayers now have to claim the actual sales price of the donated vehicle, which usually (but not always!) is less than the FMV. Also, in most cases, taking the car donation tax deduction is now a bit more complicated, since you now have to wait for a form from the charity showing what the car actually sold for.

On this page I will cover everything you need to know in order to maximise your car donation tax deduction under the current IRS rules. I'm making the assumption that you have already decided that you want to claim a car donation tax deduction and that you want to know what to do. If you are wondering if donating your car to a charity makes sense from a financial perspective, I cover that on another page, so if you haven't made up your mind yet, you might want to read that page first: Car Donations for Charity - Do They Really Help Reduce Your Taxes? (Hint: Car donations for charity do reduce your taxes, but your financial benefit is usually a lot less than if you sell your car!).

If you have decided that you'll be taking the car donation tax deduction, I strongly recommend that you invest a few minutes reading all the information on this page. Imagine making the effort to donate your car only to find out that the IRS disallows it because you didn't do it right! The IRS car donation rules aren't that hard to learn, so here we go...the three easy steps to taking the car donation tax deduction:

Step #1: Deterimine if your Eligble To Benefit From The Deduction

Just because you donate your car to a qualified (see Step# 2 below) charitable organization doesn't mean that you automatically get a tax break. The transaction will only reduce your taxes if you are itemizing your deductions on your federeral tax return, i.e. you're not claiming the standard deduction and you're submitting Schedule A (Itemized Deductions) with your tax return. Of course, you can still donate your car even if you don't itemize, but you won't be able to claim the car donation tax deduction. Also, your deduction cannot exceed 50% of your adjusted gross income, and other limitations may apply. If you think other limitations may apply to you, see IRS Publication 526, Charitable Contributions.

Step #2: Make Sure that your Charity Meets the IRS Car Donation Rules

car donations tax deduction - inside old beetle

Having determined in Step #1 above that you are eligble for the car donation tax deduction, the next step is to make sure that the charitable organization of your choice meets the IRS requirements as a qualified charitable organization. Most charitable organizations steate this information on their web sites, but I recommend that you double check, especially if your charity is one of the smaller, less known charities. If it turns out that your charity is not a qualified charity, the IRS will end up disallowing your car donation tax deduction. I've added a list of qualified charities that accept car donations here.

The most widespread type of qualified organizations are Section 501 (c) (3) organizations, e.g., charitable, educational or religious organizations. You can verify that the charity of your choice is qualified by checking IRS Publication 78, Cumulative List of Organizations: Car Donation Tax Deduction - IRS Publication 78.

Keep in mind that not all charitable organizations are required to apply to the IRS for inclusion in Publication 78 in order to be qualified organizations. For example, churches, temples, synagogues and mosques are frequently not listed. If you want to donate to your local organziation and you are not sure if they are qualified, you can call the IRS Government Entities toll free at (877) 829-5500 to find out. When calling, make sure that you have your charity's correct name, and preferably also their address.

Step #3: Donate your Car to a Qualified Charity and Figure Your Tax Deduction

Most charities make the actual donating of your car very easy to do. Most of them will arrange for a free pickup of your vehicle, whether it is running or not. For a a list of qualified charities that offer free towing services, check out my web page LINK HERE. One more thing, some charities offer free vacations and other fringe benefits if you donate your car to them. That's not illegal, but if you take them up on their offer you will need to reduce your car donation tax deduction by the value of the fringe benefit received (as per IRS car donation rules).

Figuring Out Your Car Donation Tax Deduction

Saying that you will be "figuring out" your car donation tax deduction is perhaps not entirely accurate, since under the new IRS car donation rules, in most cases the amount you will be able to deduct will be reported to you in an acknowledgement letter that your charity sends to you after they've sold your vehicle.

Like I explained above, in most cases your car donation tax deduction is limited to what the charity is able to sell the vehicle for, the gross proceeds it receives from your donation. The IRS car donation rules refer to this as the "Gross Proceeds Limit" rule. What the IRS is saying here is that when calculating your car donation tax deduction, the IRS doesn't care what the Fair Market Value of the vehicle was, it cares only about the "benefit" that the Charity received from you, which is the gross proceeds it receives from the sale. This is not such good news if the FMV of the car you donated is say, $1,500, but the charity sells it for $700. Your car donation tax deduction would be limited to $700. Since your car donation tax deduction is limited to the sales price you have to wait for the acknowledgement letter from the charity before you can claim your deduction. In most cases, your acknowledgement letter will arrive within 30 days after they picked up your vehicle. The acknowledgement letter will tell you the amount you will be able to deduct on Schedule A of your tax return. If your car donation tax deduction is more than $500, you must attach the acknowledgement letter to your tax return.

If Your Car Donation Tax Deduction is $500 - $5,000: If the deduction you're claiming is more than $500 but less than $5,000, you must complete Section A of IRS Form 8283, and attach it to your form 1040.

If Your Car Donation Tax Deduction is Greater than $5,000: If the deduction you are claiming is greater than $5,000 you must complete Section B of IRS Form 8283 which must include the signature of the authorized official of the charity, and attach it to your return. In addition, if your car donation tax deduction is over $5,000 and not limited to the gross procees from the sale of your car, you must get a written appraisal of the vehicle.

Putting it all together - Your Car Donation Tax Deduction Analysis

As you're probably thinking by now, being limited by the post-2005 IRS car donation rules and the "Gross Proceeds Limit" you have no guarantee that your car donation tax deduction will be even close to what the car you're donating is really worth (FMV).

What that means to you depends on your personal situation and your preferences. Perhaps you really don't care that much about your deduction; you just want your donation to go to a good cause. In that case, just go ahead and make your donation, and claim your deduction based on the acknowledgement letter you receive. I think that many people fall into this category.

But There is a Legal Way to Maximize Your Car Donation Tax Deduction!

If you are really determined about maximizing your car donation tax deduction, there is a "loophole" that allows you to do so. I hesitate using the word loophole, because some people take that to imply something crooked, and the strategy I'm referring to is completely legal and the IRS even spells it out in their publications. It is not even hard to do, once you have the information. I'm trying to keep this content in digestible chunks, so if you are interested in this strategy, please see my page Tax Deductible Car Donations.

See you there!