Your car has served you well for years, and now it’s time to upgrade to a new one. Typically, you have three options for disposing of your old car: trade it in for a new one, sell it, or donate it. If your old car is still in tiptop shape, trading it in can shave a considerable amount of money off your new car purchase. If it’s not in good enough shape to trade in, you can always sell it to a private individual for somewhere in the vicinity of its Blue Book value. However, if you’re not strapped for cash and can afford to donate the car, giving it to a charitable organization can help your favorite charity fund essential programs while earning you a tax deduction.
Why Donate Your Car to Charity?
Individual donations provide the majority of funding for nonprofit organizations and other charities, accounting for 72 percent of all charitable donations in 2013, according to the National Philanthropic Trust. Over 95 percent of U.S. households donate to charity every year, funding programs dedicated to causes like the environment, the arts, health, education, and animals.
Donating to charity, whether you’re giving cash, goods, or services, keeps these organizations afloat and working toward their various missions. Because the work of the estimated1.8 million charities in the U.S. is a fundamental building block for progress in our country, the U.S. government promotes charitable giving by providing tax deductions for donations.
Intermediary Organizations vs. Direct Donation
If you Google “donate car to charity,” you’ll quickly learn that there are a multitude of intermediary organizations to which you can donate your car to benefit the charity of your choosing. While it’s often simpler to use such an organization for your donation, the benefit to the charity will be considerably smaller than if you donate the car directly. Even though many of the middlemen are reputable, they are for-profit entities, and they typically keep up to half of the proceeds from the sale of the vehicle. Disreputable intermediary organizations may keep as much as 90 percent.
It’s always best to find a charity that accepts direct donations of vehicles to ensure they get the most benefit from your contribution.
Choosing the Right Charity
If you don’t already have a favorite charitable organization to donate to, or if your favorite charity doesn’t accept car donations, the first step is to narrow down a couple of issues that are close to your heart and choose a few organizations that work for those causes.
The next step is to do some homework to find out whether the charities on your list are qualified to accept tax-deductible contributions, how efficiently they use their funds, whether they accept vehicle donations, and if so, how they use them, which has a bearing on the value of your tax deduction. You can check out our car donation reviews here.
Finding a Qualified Charity
You can only claim a tax deduction if the charity you donate to is registered with the IRS as a 501(c)(3) organization, which indicates they’re qualified to accept tax exempt donations. Churches, synagogues, temples, and mosques aren’t required to register with the IRS, but they are all qualified.
To find out whether a charity is qualified, you can contact the IRS in one of two ways:
- Call the Customer Account Services Division for Tax Exempt and Government Entities at 877-829-5500.
- Use the “Exempt Organization Select Check Tool” on the IRS website.
Not all charities are equal when it comes to the efficient use of funds and their effectiveness in furthering their mission. Choose a charity that uses the majority of their funding for programs rather than administrative and fundraising expenses. With a little research, you can find a charity that will optimize your gift to directly benefit their cause.
- GuideStar is an organization that collects information from every 501(c)(3) organization’s IRS Form 990 and compiles it in an easy-to-understand format. The information they provide includes details about income, spending, and executive salaries.
- Better Business Bureau’s Wise Giving Alliance evaluates over 1,000 national and 10,000 local charities, applying 20 accountability standards like governance, financials, oversight, and effectiveness.
- Charity Navigator analyzes charities and gives them a one- to four-star rating based on the information on their Form 990, including the percentage of funds spent on programming in contrast to the percentage spent on administrative and fundraising operations.
A charity that spends 60 percent of its funds on programming is considered satisfactory, while one that spends 75 percent or more on programs is considered highly efficient.
How a Charity Uses Your Donated Vehicle Impacts Your Tax Deduction
There are a number of ways a charity might use your donated vehicle, and how they use it determines the amount of the deduction you can take on your taxes. If any of these apply, you can deduct the full amount of the Fair Market Value of the car:
- The charity keeps the car and uses it.
- The charity makes improvements to the car and sells it.
- The charity gives or sells the car at a discount to a person in need.
If the car is sold to someone other than a person in need and the proceeds are less than $500, you can deduct the fair market value of the vehicle up to $500.
When contacting the charity, ask how the car will be used. You can maximize your deduction by donating your car to a charity that will either give or sell it at a discount to a person in need or keep it to use in their operations.
It’s essential to keep a clear paper trail when donating your car to charity. Non-cash donations are a common trigger for audits by the IRS, and keeping impeccable records ensures protection against fines, fraud, and liability.
Once you’ve arranged with the charity to donate your car, you’ll need to make sure you complete all of the necessary paperwork:
- At the DMV, cancel your registration, transfer the title, and fill out a Notice of Transfer or Release of Liability, which will vary by state.
- Cancel your auto insurance policy.
- Fill out the charity’s paperwork. The most essential form is the Assignment of Ownership. If you neglect to fill this out, you will be held liable for parking tickets incurred and for any crime committed with the car.
Within 30 days, you’ll receive a written acknowledgement from the charity that contains important information about the donation. Keep this in a safe place in case you need it in the event of an audit.