Car Donations To A Charity - Do It Correctly and Reap The Tax Benefits
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Important Tax Changes went into effect on January 1, 2005. Make sure you're aware of them.
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Thousands donate a car, van, truck or SUV every day. Why not - it can typically be a fantastic Tax Benefit.
And if you're thinking about donating your used car to Charity, here are several simple, yet critical issues that need to be addressed before you take that leap After all, you don't want the IRS chasing you down.
There's been some important changes to the Tax Laws regarding a car donation. If you want to actually read the new tax law, here's a link to the IRS Guide - new guide for car donations.
The changes to the law say that beginning Jan. 1, 2005, when a taxpayer donates a car, truck, van or suv, and the value is $500 or more, the actual deduction depends on how the charity plans to use the vehicle.
If your car donation is sold by the charity, the taxpayer is only able to deduct the amount the charity got from the sale - nothing more. Even if the Blue Book says it's worth $2000 yet only gets $1100 when it's sold, the $1100 is what you can deduct. The Charity will have in place a way to pass the selling price along to you which you then include with your tax return.
If, however, the charity plans on using the donated car or truck for "significant, tax-approved charitable work", you'd be able to claim the entire fair market value of the donated vehicle - just like the good ol' days.
Here's an example - let's say a charity is going to use your car donation for their own, or their clients, transportation needs prior to selling it. That's "significant, tax-approved charitable work" and you get to claim fair market value.
Here's two more examples - Car donations to a Vocational School that uses the vehicle in it's automotive repair classes qualifies. So does a car donation that requires significant mechanical repair such as engine or transmission work to make it ready for sale. Just remember to get written acknowledgement of the donation.
Here are some other important things to keep in mind....
- For 2005, the allowable deductions for car donations are $5,000 for single or married taxpayers filing separately; $7,300 for head of household; and $10,000 for married couples who file joint returns.
- Generally, the car or truck you're donating must have a value of less than $5000 in order to use the various online value guides. I recommend NADA numbers for car donation values - the values there tend to be a little higher than kbb.com or edmunds.com - yet make sure you check all three sources, just to be sure. And be honest when you're asked to grade the condition of your vehicle.
At kbb.com and edmunds.com, you'll want to use the Private Party Values. At the NADA.com site, use the "average" of Trade-in and Retail Values to get a handle on car donation values
Whichever Web Site has the highest value, that's the one you want to use. Print it and save that page for your Tax Records. - If you plan to donate a car and the value is more than $5000, you'll need to have it professionally appraised. Just look in your local Yellow Pages for "automobile appraiser" or "vehicle appraisal".
- This may sound like common sense - if you owe money on the vehicle, you will not be able to donate it. You can only donate a car if it is paid off and the Title is clear.
- If you are in the 25% - 40% tax bracket range, donating a car makes a lot of sense and you could generate a sizeable write-off. Make sure you check with your Tax Advisor.
- If your are in the 15% - 25% tax bracket range, it might make sense for you to try and sell the car yourself. Check with a tax advisor to be see if you should donate a car
- To take advantage of the tax benefits of donating a car, and the value of that vehicle is more than $5000, you will need to itemize your tax return. No 1040EZ Forms allowed for this. You'll need IRS Form 8283 - you can download and print Form 8283 by clicking here. **Here's an important reminder - all of the IRS Forms and Information are in PDF format (Adobe Acrobat). If you do have Adobe Acrobat, you can get a free copy at the Adobe Website
- If you want to claim the deduction for a car donation to charity, then you should make certain that the charity is a qualified organization. Otherwise, your donation will not be tax deductible. The most common types of qualified organizations are 501(c)(3) organizations, such as charitable, educational, or religious organizations - AKA known as Charities by the IRS. If you want to search for a particular Charity that accepts Car Donations, click here for the IRS database of recognized charities. All you have to do is put in your City and State. I recommend you review it.
If you're still not sure if the Charity is legitimate and want to check if they qualify for car donations, just give the IRS Customer Account Services Division for Tax Exempt and Government Entities a call at (877) 829-5500 (toll-free). Be sure to have the Charity’s correct name and address. - Churches, synagogues, and mosques, are not required to file exemption applications and annual information returns and many times will not have IRS proof of a charitable organization. Not to worry - if you belong to a church, synagogue or mosque and wish to donate a car to that group, it's Ok - It's tax deductible.
- Generally, state charity officials will ask you to transfer the car title to the charity, to make a copy of the title transfer, and to notify the state motor vehicle administration by updating the information on the donor’s car registration about any sale or transfer.
In some states, however, there are exceptions to this titling process, and a third party, such as the charity’s agent, may be able to hold an open title or insert a dealer’s name.
When you decide on what Charity you will donate your car to, just ask them how they process the title transfer - they usually handle it. - Before donating the car, you should remove the license plates, unless state law requires otherwise. You want to avoid any liability issues once the car is transferred.
- Remember - Most Charities will come get your car, if need be. After you agree to donate it.
Again, always check with your Tax Advisor to see if a Car Donation will benefit you. - And lastly, avoid any Web Site that appears to be a Car Donation Aggregator - meaning they claim to represent many charities and actually appear to help. Yet, it's almost impossible to directly tie them to any to any IRS recognized Charity by looking through their web site.
If their Web Site does not say they are a 501(c)(3) Charity, it's usually a sham - and hugely profitable for the owners of those type organizations. Avoid them like the plague.
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