Charitable organizations tend to step up their calls for donations around the holidays each year. Old cars are especially appreciated. With a car donation, you don’t just manage to support a cause that you like without spending any money. You will also make money off the donation by claiming a tax deduction. All of these claims are true. If you have a car to donate, you should quickly get it to an organization that can put it to good use. Before you make the call, though, you should learn something about the process, and keep a little advice in mind.
If the idea of donating to a preferred charity at no expense appeals to you, you need to remember that the situation today used to be better a few years ago. Before 2005, you could easily claim whatever fair market value your car commanded, as a tax deduction — the IRS pursued a no-questions-asked policy. After they watched car owners take unfair advantage of the deduction for years, though, the IRS finally announced new rules in 2005.
The IRS knows that most cars fetch less than their fair market value when they sell. If you claim a deduction for a car that equals its fair market value, you’ll usually get audited. Today, you are only allowed to deduct the exact value that the charity that you give your car to manages to get out of it.
Whatever price you do manage to get, it may not give you much of a deduction: you only get to deduct what your tax bracket permits. For instance, if you are in the 28% tax bracket, and if the charity you pick sells your car for $1,000, you will only be allowed a 28% deduction or $280. Before you decide to donate a vehicle, then, it’s important to keep your expectations realistic.
The itemization complication
While donating a car involves many tax-related complications, one, in particular, stands out: it’s possible that your itemized deductions add up to a sum that is smaller than your standard deduction. In this case, you get no tax benefit at all when you donate your car.
Be prepared for a certain amount of paperwork
A deduction for a donated car (even if the car is nothing but a rusty shell with no upholstery or tires) can require a great deal of paperwork. Unless you are familiar with the process by which deductions are made, and can do your filing yourself, it can cost you more than a regular filing.
Getting the documentation in order can require some effort. To begin, whatever the charity does with the car that it receives, it owes you an acknowledgement of its value within 30 days. This receipt will allow you to claim your tax deduction.
If your donation is valuable enough to fetch you a deduction worth more than $5,000, you have extra paperwork to do — you need a written appraisal, and also need to attach Section B of Form 8283 to your tax return.
The charity that receives your car needs to make sure that the title is duly transferred to itself. Many charities become careless about title transfers, though, and let the people who receive their donated cars drive away with no title change done. This can be a risk — if the car should ever be involved in an accident in the future, it will still be traceable to you. You need to make sure that the title is transferred.
Make sure that the charity is qualified
The IRS only allows you to make a deduction for a car that you donate if you give it to a tax-exempt non-profit. While you can always ask the charity that you’re interested in for its tax exemption status, it is usually a good idea to check its claims out on the IRS’s website. The IRS’s Publication 78 lists all the organizations that it offers it tax-exempt status to.
It’s important to remember that tax exempt status isn’t a guarantee that the charity itself does good work — it only shows that the IRS will offer you a deduction.
A little more research may be necessary
Before you donate your car to charity, you should make sure that the organization that you giving to is indeed a charity and not a telemarketing company seeking donations for a charity. Organizations such as Charity Navigator and Charity Watch offer detailed reviews of hundreds of charities. If the charity that you planning on donating to uses to telemarketer, you’ll learn about it on one of these databases. When an organization uses telemarketers it is forced to share a large portion of each donation with them.
An alternative way to donate your car
Donating cars is important. These donations have the power to provide jobs and change lives. If the paperwork involved in making a successful donation puts you off, you can still donate a car in an easy way.
Claiming a tax deduction isn’t the only way to donate while benefiting from it. You could take matters into your own hands. To begin, you might sell your car cheaply to a needy person, through the classifieds. You would help a poor family with its transportation needs. Whatever you make off the sale, you could donate half of it to a charity of your choice, and then claim the donation as a deduction.