Have you been considering donating your vehicle to a local charity or to one that you have seen or heard about on? It’s important to note that donating a vehicle may not result in a big tax deduction — or any deduction at all.
Trade in, sell or donate?
Let’s say you’re buying a new car and want to get rid of your old one. For options you could trade in the vehicle to the dealer, sell it yourself or donate it to charity.
If you donate, the tax deduction depends on whether you itemize and what the charity does with the vehicle. For cars worth more than $500, the deduction is the amount for which the charity actually sells the car.
Because many charities wind up selling the cars they receive, your donation will probably be limited to the sale price.
Furthermore, these sales are often at auction, or even salvage, and typically result in sales below the Kelley Blue Book value.
To further complicate matters, you won’t know the amount of your deduction until the charity sells the car and reports the sale proceeds to you.
There are instances where the charity uses the car in its operations or materially improves it before selling, and your deduction will be based on the car’s fair market value at the time of the donation.
So, the Charity sold the car for $1,000 – is that my deduction for taxes?
Even if the Charity sells your car, you must itemize your deductions in order to claim on your tax return and receive any benefit. We have seen this year that under the new tax law, fewer people are itemizing because the law significantly increased the standard deduction amounts. So even if you donate a car to charity, you may not get any tax benefit, because you don’t have enough itemized deductions.
Other items to consider
If you do donate a vehicle and itemize, be careful to substantiate your deduction. Make sure the charity qualifies for tax deductions. If it sells the car, you’ll need a written acknowledgment from the organization with your name, tax ID number, vehicle ID number, gross proceeds of sale and other information. The charity should provide you with this acknowledgment within 30 days of the sale.
If, instead, the charity uses (or materially improves) the car, the acknowledgment needs to certify the intended use (or improvement), along with other information. This acknowledgment should be provided within 30 days of the donation.
Consider all factors
Of course, a tax deduction isn’t the only reason for donating a vehicle to charity. You may want to support a worthwhile organization. Or you may like the convenience of having a charity pick up a car at your home on short notice. But if you’re donating in order to claim a tax deduction, make sure you understand all the ramifications.