What to Expect from a Car Donation Tax Deduction

November 8, 2013

Don't be mislead by articles based on old car tax donation laws. Get current information on car donation programs.

Tax Refund

A car donation tax deduction can be confusing. Lots of charities tout a car donation charity tax write-off as a great way to benefit from helping a nonprofit organization, but too often, those looking for a tax write-off don't really understand the kinds of tax breaks offered by the IRS.

Old Laws No More
The former car donation tax law stated that people who gave their car to charity were allowed to deduct the fair market value of the car from their tax return. It required that they do a little research to find out the value of the vehicle. Under a tax bracket of 33 percent, donating a car worth $3000 meant $1000 off of the taxes. This was reason enough for over a million people per year to make this type of donation. However, people began to deduct not only the fair market value, but the suggested retail price of the car in question. Thus, if the car was worth $3000, but a retailer would mark it up to $4500, the bigger number became the deduction. Needless to say, this tax law has been changed.

New Car Donation Tax Law
Because of this, the tax law was changed in 2005. Cars that are worth more than $500 may only deduct the charity's actual selling price. This means that when you donate a car to charity and they sell it, whatever they sell it for is what you may deduct. If you donate a car that is worth $2000 to a charity, and they sell it for $900, you are only allowed to deduct $900 from your taxes. As an exception, if it sells for less than $500, you may deduct $500 from your taxes provided the charity meets IRS qualifications.

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Statement of Actual Sale
In order to receive the deduction to the value of the charity's selling price for the car, you must attach a copy of the bill of sale to your deduction form. The charity has 30 days to send you that copy by law.

Limitations on Acceptable Charitable Organizations
Not all nonprofits or organizations are legitimate car donation venues. IRS documentation provides guidelines on what kinds of charities are legitimate parties for a car donation tax write-off.

Gross Proceeds and Value Limitations
Another huge limitation on the actual tax deduction that you can take from donating a car relates to the specific use of the car by the organization you donate the vehicle to. According to IRS rules, the maximum value you can deduct is usually the price at which the charity resells the vehicle. In other words, regardless of the market value on your vehicle, you typically need to wait until the charity is able to resell it, and then only claim that amount as a tax deduction.

Itemizing Tax Deductions
On a 1040 annual income tax return, there are two options: itemized or standard deductions. Many households opt for the standard deduction, and in this case, your car donation cannot be factored into your tax deduction at all. You only get a charity tax write-off for your car if you itemize deductions. Because the standard deduction is several thousand dollars, some of those who are donating lower value vehicles find themselves with no applicable tax deduction at all when they go to file a tax return.

What You Save
If someone who donates a car to charity is able to get a legitimate tax deduction, the amount of money they save is limited to their tax percentage on the value that they deducted. This kind of charitable write off is better for independent contractors and similar workers, who pay double what regular employees do on Social Security taxes on their income. Individual households have to look at their own particular tax liabilities in the year of their car donation to see what kind of savings would result from handing their vehicle over to a local charity.

Claim Full Market Value
There is, however, a way to still deduct the full market value of your donated car. If you give the car to a charity that furthers their charitable aim with that car rather than sell it, you're able to deduct the full market value. In other words, if the charity to which you give the car turns around and gives that car to a person or family in need, the full market value can be deducted from your taxes.

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Results of the New Changes
Obviously, these tax law changes benefit certain parties and not others. The lower value for tax savings deters some individuals from donating vehicles all. Others seek out public nonprofits that use the vehicles rather than reselling them.

Some conventional charities who rely on the resale of vehicles for raising funds have complained about the tax law changes, saying that it makes the car donation process unappealing because car owners don't have a value for a tax reduction at the time of donation. These charities argue that having various concrete values helps families make decisions about what they would do with a vehicle.

How to Setup Your Nonprofit for Car Donations

How does a non-profit set up a car donations program? It is important to understand the process before getting involved. Some charities contact fundraising companies to handle the entire project and then collect a percentage once the cars have been sold to auction or scrapped at the junkyard. If choosing a third party fundraiser to handle the project, beware of those in the business for making money off of the process and giving the charity a less than charitable cut of the proceeds. Any third party broker should have sound references. They also should be able to quote the percentage of the proceeds that will go to the charity organization.

For those non-profits that wish to tackle the project themselves, the first requirement is a plan establishing resources and benefits necessary for a successful venture.

Resources for a Car Donations Program

  • Access to a towing service for picking up donor vehicles and a dispatcher to transport them to auction.
  • Volunteers or staff to handle paperwork relating to obtaining the title and transfers of ownership.
  • A process for liquidating the vehicle by selling it to an auction.
  • Internal accounting expertise to track tax records for sales and handling donor's receipts.

Questions to ask before Starting a Car Donation Program

  • Should distances from the non-profit have a stipulation?
  • What about vehicles that is over twenty years old?
  • What are the costs associated with overhead services, phones, transportation and gas, for example?
  • Titles are often handled by mail, how long is this title process?
  • Where will the vehicles be stored until they can be sold or disposed of?
  • What is the turnaround time for selling vehicles and does it vary based on the age or model of the car?

The decision to start a car donation program is a wise one, since a great portion of consumer wealth is tied up in pre-owned goods. The majority of charities spend 92 percent of their time and energy marketing and advertising for funding to keep the organizations up and running to help others. A non-profit could benefit greatly by transferring these fundraising resources in-house to set-up and run a car donations program. Cash donations are becoming increasingly difficult to solicit from willing donors. Accessing funding from assets already in the consumer's hand, such as older cars, is an easier choice for donors to support.