Donating your car is a huge step towards helping the needy. Not many will take this step. But if you are willing to go down this road, the government also wants to encourage you. They offer you a tax deduction on donating a car. This way, you get some amount back when you itemize your tax deduction. And the amount of the tax deduction is equal to the amount the charity sold your car for. Great, isn’t it?
Tax deductions can get complicated. So, here is a complete guide about tax deduction on donating a car. So let’s begin:
How Does Tax Deduction Works When You Donate Your Car?
The whole story of tax donation can be covered in 5 simple steps. First, you find a tax-exempt charity to whom you donate your car, and they sell it. After the sale, you itemize your deductions and determine the amount of deduction you can claim. After that, you need to do the form filling and other necessary documentation. Lastly, file tax returns.
Here is everything in detail:
#1: Explore and find your cause or charity
If you want to donate, the first thing you ought to do is ask yourself what cause I want to support. Once you know the cause, find a tax-exempt NGO. More commonly known as a 501(c)(3) organization. You must also know that religious organizations like churches, mosques, synagogues, etc. are considered tax-exempt without filing for 501(c)(3) status.
You must be doubly sure that the organization has the exempt status. And for that, you can go to the IRS Exempt Organizations Select Check or call them at (877) 829-5500. You can also ask for the organization’s IRS letter that declares it as tax-exempt.
#2: Itemize your deductions
To be able to claim your tax deduction on donating a car, you need to itemize it on Schedule A of IRS Form 1040.
It is important to explain here that you may not get the deduction if you go for standard deductions instead of itemizing your tax. It is a good idea to put in the effort of itemizing your tax deductions if your total itemized deduction is going to exceed the standard deductions.
Pro Tip: A good thing to know here is that the right way to go is particular to your conditions. The advice given here is general knowledge and cannot be considered a trained accountant or tax advisor. You must always consider the help of a professional if possible.
#3: Find out the amount of your deduction
You obviously want the maximum deductions. So, here is a table to arrive at a conclusion about whether you will get the Fair Market Value of your car or your vehicle’s selling price. Well, it all boils down to what the charity does of your car:
|If the Charity||Then Your Deduction Will Be|
|Keeps it for their own charity chores||You will enjoy the Fair Market Value of your car|
|Sells it for less than $500||Then you can either get the Fair Market Value or $500, whatever is less|
|Sells it for more than $500||You get the full deduction of the selling price of the vehicle|
So, here you may think, what exactly is Fair Market Value?
Fair Market Value is the price of your car you will get in the open market. You can use resources like Kelley Blue Book to figure out your vehicle’s current market price. But also consider that the FMV of your car will be subject to its condition too. It may decrease, considering that the engine is worn out or increased subject to the vehicle’s excellent condition.
#4: Time for documentation
This is the fourth step in tax deduction on donating a car and may feel tricky, but we have explained it easily for your help.
The documentation required entirely depends on the selling price or the FMV of your vehicle. The documentation is divided into three categories:
Note: You will need the below documents in addition to the Schedule A for the itemization of your deduction. That is, if you choose to itemize instead of the standard deduction.
- Less than $500:
Since the value is less, the documentation is also less. You just need a document with:
- Name of the charity.
- Description of the vehicle.
- Lastly, a confirmation that the car was received with its value.
And to your relief, all of these are generally found on the receipt the NGO gives you. So, you will just need to attach the receipt with your tax file, and you are done.
- Between $500 and $5000:
The documentation for this category is not much complicated either. You will require:
- Name of the charity
- Description of the vehicle
- A confirmation that they received the car and its value.
- Copy B of form 1098-c OR the Legal Substitute
- And lastly, if you are e-filing the tax, Form 8453.
As you can see, the top three documents are the same, and a receipt would do. But you will be glad to know that they consider the receipt of SOME NGOs as a legal substitute. So, do ask the NGO you are considering if their receipt is a legal substitute or not. However, 1098-c is not a big hassle if you particularly like an NGO. After all, it’s your bit for the society.
- More than $5000:
Since the amount is considerable, the documentation here requires attention. In this case, the IRS requires:
- IRS Form 8283
- Form 1098-c OR legal Substitute
- You need an appraisal of the vehicle’s value (done no more than 60 days before the donation). The good news is that you can itemize the appraisal expenditure in the miscellaneous expenses.
- If you are claiming the FMV of your vehicle:
When your charity plans to use the vehicle for their own or wants to make specific improvements, you can claim the FMV. But in this case, you require written acknowledgment from the charity that the car will not be sold before they make the said use or modifications. They also need to specify the help they will put the vehicle to.
#5: File your taxes
Attach all the above documents with your federal tax return file. You need to finish the donation process before 31st December 11.59 PM to file for the deduction that year.
Also, your tax deduction depends on your state’s guidelines. Therefore, do remember to check them before filing your taxes.
Summarizing, we will like to say that filing a tax deduction on donating a car is not a hassle. You can easily do it. The last thing to know is that the tax deduction will not be a tax credit. Instead, they will deduct the money from your taxable income, and thus your taxes will be lower.
So, this was all in our guide about tax deduction on donating a car. We hope you got the clarification you needed. But if still, any questions pop, please drop them below in the comments. We will be glad to answer.