Tax Deduction for Vehicle Donation to Charity
Owners who Missed Cash for Clunkers can Still Get a Break on Taxes
Oct 7, 2009
The United States government has provided a number of opportunities for individuals to improve financially by trading in their cars. Cash for Clunkers provided additional funds for trade-ins of older models for fuel efficient new vehicles.
For those who were unable to take advantage of that program, the Internal Revenue Service allows people to receive a tax deduction from Adjusted Gross Income if they donate the vehicle to an approved charitable organization.
Fair Market Value
Prior to 2005, a great deal of information was given out that taxpayers could get a deduction for the fair market value of a car, even if it was not in good, or even running condition.
Fair market value would generally be considered what the car could be sold for to an unrelated party, for instance, a stranger, as opposed to what family or friends might pay for it. In order to avoid having to obtain bids on what the fair market value was, people often referenced books or sites of Edmunds Inc. or similar resources.
Tax Law Changes
For 2005 and later year tax years, the law was changed, which in most cases would limit to the deduction. A tax deduction could still be obtained for a donation to a charitable organization, but the donor and donee, (the charity) would have to substantiate the value of the donation.
If the donated vehicle is sold and the charity keeps the proceeds, the donee is required to provide documentation, including the sales price, within 30 days of the sale. If a car is sold at auction, the donee still needs to report the auction sales price.
If the charity significantly improves the value of the car before sale, or the charity uses the car for its charitable mission, the taxpayer can deduct the fair market value. The value established should be for that particular vehicle, with deductions for excess mileage or condition.
Negatives to Vehicle Donation
- Taxpayers have to take the deduction in year the vehicle is donated, and can only deduct it if they itemize deductions. If the taxpayer uses the standard deduction, no additional amount can be deducted.
- Remember, a deduction is different than a tax credit. A deduction only reduces taxes owed by a percentage. In the 28% tax bracket, a donation with a fair market value of $1,000 only reduces taxes by $280.
- Any donation over $500 requires documentation, usually a receipt.
- Only donations to charitable and religious organizations or governments qualify. The IRS provides a partial listing of qualifying charities in Publication 78.
- Many individuals use a trade-in to provide a down payment. People may not qualify for financing, or may have to deposit additional funds when purchasing another car.
- In some states that charge sales tax on vehicles, a trade-in will reduce the amount of sales tax charges on the new car. The tax is figured on the net value, after the trade-in.
Donating a vehicle can be emotionally and financially satisfying for taxpayers, as long the rules are followed.
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