Donating your car to a cause you are interested in can be deeply rewarding. This generous act of kindness can be a win-win for the charity and yourself, provided your donation meets the provisions stipulated in the 2004 law. When filing your taxes, remember to include your charitable contribution deductions to maximize the tax savings.
If you wonder if donating a car will help with the tax burden, the simple answer is yes. Car donations not only benefit the charity case and make you feel good, but they can also lower your taxes. However, you need to understand that the deductible amount varies significantly depending on your car’s value. We will be looking at the donations process, especially car donations, and how they impact your tax payments.
What Qualifies as a Donation?
A charitable contribution is a gift that you give in the form of money, goods, or service to charity or nonprofit organizations without any exchange of value on the recipient’s part. For your donation to count by IRS standards, your donation needs to go towards a certified organization, 501(c)(3), listed in the Publication 78 document on IRS’s website. If you donate to a charity that doesn’t appear under this list, that donation won’t be tax-deductible.
A donation doesn’t need to involve a physical item. For example, if you donate a car, you don’t have to give the physical vehicle to charity; no. You can choose to sell it and then donate the proceeds to charity. The good thing about donating your car in monetary terms is that you will have more control over the tax credit size that you get. To get paid for your junk car instead of donating the car directly, click here.
Will Donating a Car Lower My Taxes?
Before 2005, people who made car donations took tax deductions based on the market value and not what the car actually fetched for the charity at the auction or after the sale. This made the determination of tax deduction amounts quite confusing and time-consuming.
In January 2005, the IRS passed a new law detailing how much one was entitled to as deductions for donating their car. The new law on donations took the guesswork out of the process, making it easier to determine the value of trucks, RVs, cars, and other vehicles donated as charity. The law allows taxpayers to claim charitable tax deductions in an easy and fast way while observing this:
Where a donated vehicle fetches under $500 or less, you can claim a charitable tax deduction per the fair market value of your car. If the car’s market value is $500, you can claim a tax deduction of up to $500. If your donation goes above $500, you are entitled to a tax refund of the exact amount they sold the car for.
This answers the question with an affirmative. Donating your car helps lower taxes since your tax amount will be adjusted as per the car’s selling price.
Why Make a Car Donation?
- Help a charity whose cause you believe in and whose works you support.
- Provide the mobility means for the charity to further their charitable mission.
- Giving to charity is a mood-booster that makes you feel more fulfilled, happier and strengthens your social conscience.
- To save yourself from the trouble of having to sell the car, especially old clunkers.
- Car donations provide a way to get rid of that car without the proper title out of your driver, saving you on the cost of replacing the title.
- Car donations to charity can get you a healthy tax deduction when itemized correctly and the proper documentation included as you file.
What is The Process of Donating a Car?
Obtain a Car Valuation Report
The first step in making a car donation entails getting a dated valuation on your car. The valuation will be important when filing for a tax deduction since the deduction amount will be dependent on the car’s value. Ensure the agency that does your car valuation is recognized by the IRS. Online tools like Kelly Blue Book and cash car buyers online can give you an idea of the much your car goes for in the market.
Select Your Charity of Choice
Don’t fall for fraudulent charities, do your research. All legitimate charities are registered under IRS.gov. A good charity will have a 501©3 status and strive to make donations the best possible good. Ideally, a good one should have their administration costs below 15% of the proceeds, with 85 to 75% going to the cause.
After settling on your charity of choice, hand over your car and sign over your title to the charity by filing a transfer form with the motor vehicle agency. You can also sell your car and donate the money to charity.
Keep proper documentation
When you donate your car, ensure you keep a good record of documents confirming your donation. Ensure you retain a written acknowledgment or receipt from the charity you donated to that clearly itemizes your donation. When you file to claim a deduction with IRA for a charitable contribution, you will need these.
Steps to Follow in Claiming a Tax Deduction
It is important to emphasize that the process of handing over your car to charity and then deducting its value or selling price from your taxable income is not a simple one. The IRS criteria are strict, and for you to deduct any charitable deduction, you’ll need to meet it. Not every car giveaway counts as a donation. For example, giving your car to family and friends isn’t a donation. So, before you donate your car to charity, remember this:
- To claim a charitable car donation, you should itemize your taxes.
- Your car donation will only count as a tax deduction if you donate to a registered 501©3 organization listed on the IRS website.
- When filing for a tax deduction, you will need to have written documents: a written receipt from the charity (Form 1098-C) acknowledging receipt of your car and a written appraisal if your car is worth more than $5,000.
- You have to file the proper tax forms depending on what the charity does with your car and if the value amount you wish deducted from tax exceeds $501.
When claiming a tax deduction, Ensure you follow these four steps:
Step 1: Determine the selling price of the car
The first step towards claiming a tax deduction on a car you donated is finding out how much the charity obtained from selling your vehicle. The vehicle’s selling price is the amount of money you are entitled to claim as a tax deduction.
You are only entitled to claim a tax deduction for the exact amount that the charity sold the car. For example, if your car is worth $5,000, but they sell it for $4,000, your deduction is limited to $4,000. If the charity sells the car to a needy person at a heavily discounted price or chooses to keep it for their use instead of selling, your deduction is equivalent to the car’s fair market value. You deduct the fair market price or the actual selling price, whichever is lower.
Step 2: Determine the car’s market value (fair)
You need to have the factual market value of the car to calculate your tax deduction accurately. IRS requires that you use a reputable guide for the pricing based on the model, makes, and overall condition. Your tax deduction depends on the car’s value when you donate it. It would be best if you documented this estimate in a dated printout.
If the charity sells the vehicle donation, your deductions will be equivalent to what they sold it for. Keep documentation of this transaction as it will be required when filing your tax claim.
Step 3: Claim the deductions
When filing for a deduction, there must be documentation backing your claims of the car donation. After donating, the charity should give you documentation that clearly shows your name, tax ID number, vehicle identification details, date of donation, and a statement of any goods and services that you might have received after donating.
You can only claim a car deduction if you itemize it. So, fill in your deduction amount on Schedule A on the IRS platform. The filing status of your eligible expenses on the schedule must exceed the deduction amount.
Step 4: Complete the additional forms
On the IRS website, fill in the additional forms according to the value of your car donation. For cars valued between $501-$5,000, you will fill Section A form 8283 and either have a written acknowledgment or fill Form 1098-C. If the deductions exceed $5,000, you will need to have a written acknowledgment document or file Form 1098-C, file Form 8283 of section B, and a written appraisal if the charity keeps the car for their use.
Making a car donation is an excellent way to get that tax deduction, clear your yard, and help out needy people at the same time. Even old junker cars can still qualify as donations if the charity can still sell them to a scrapyard. Make that car donation to a charity of your choice, and whether the donation qualifies for a tax deduction or not, you can be sure that the charity will be grateful for it.