SolveYourProblem Article Series: Taxes
Help Me Understand My Taxes

Tax Breaks For Donating Your Car to a Charity

If you have an old car taking up space in the driveway, but you can’t bring yourself to face the hassle of trying to sell the car in the newspaper classified ads, there’s another way you can rid of it. Contact your favorite charity and see if they are interested in taking the car off your hands. Not only is giving your car away to a charity good for deposit in your karma bank, when tax time rolls around, that donation can help keep some of your cold hard cash in the bank as well by allowing you to take a potentially sizable deduction.

First, a little bit of bad news: giving a car away to charity for a tax break is not as easy as it used to be. The old tax laws let you write off the fair market value of any car you gave away to a charity group. Fair market value was determined by auto industry standard evaluation services, like the Kelly Blue Book, so if the Blue Book value of your car was $2,000, you got to write that whole amount off when tax time arrived. That system was fraught with abuse, however, with people claiming inflated donation values in the amount of $654 million in one year alone. Therefore, the law changed in 2005, and the IRS now places some rules on the way donation deductions are claimed.

As a general rule of thumb, the IRS places a cap on vehicle donation deductions of $500. If your donation is worth more than that, then you will meet a few criteria before you can claim your deduction. First, you need to know how the charity is using your car. If they take if from you and sell it, then the price they sell it for is the amount you can claim as a deduction, even if it is less than the value of the car. If the charity sells your car for more than it is worth, you can only claim a deduction up to the fair market value of the vehicle.

There are a few exceptions. If the charity decides to give the car away to a needy person, or if they sell the car to a needy person for far below the fair market value, then in most cases you can claim the actual worth of your car as your deduction. Also, under the “Intervening Use Exception,” if the charity uses your car for awhile before selling it, and then sells it for below the fair market value, you can claim the value of your car at the time of the donation as your deduction, since their use of the car lowered the value. However, if the charity makes improvements to the car during their time using it that increase the value of the car, and then they turn around and sell it for more than it was worth when you donated it, you can still only claim the fair market value of the vehicle at the time of donation. Whichever circumstance applies to you, the charity should notify you in writing within 30 days of receipt of the car of their intentions for the car and the donation value. If they sell the car, they must notify you within 30 days in writing of the sale price.

Keep in mind that deductions are not subtracted directly from your tax bill, but rather allow you to reduce your tax bill by a percentage. Exactly how much a deduction will take off your tax bill depends on your income and how you file.

# # # # #

SolveYourProblem.com : 2007

> Home > Tax Articles: Main Page