The ads from charities that accept donations of used cars make it sound simple. The charity picks up the vehicle, and you get a big tax deduction. Everybody wins.
But depending on what happens to the car after it leaves your driveway, you could receive a much smaller deduction than some of those ads imply. In 2005, the IRS tightened the rules governing donations of used cars. The change came in response to reports that many people were overestimating the value of junkers donated to charity.
In most cases, your deduction is limited to the amount the charity receives from the sale of the car, said Bob Meighan, vice president of TurboTax. So if the charity sells the car for $1,000, your deduction is limited to $1,000. But there are two exceptions to this rule: First, if the charity sells your vehicle for $500 or less, you can deduct $500 or your vehicle’s fair-market value, whichever is less.
The other exception is when the charity uses the car as part of its charitable mission.
For example, if the charity repairs donated cars and gives them to needy families, or if the charity uses donated cars for specific tasks, such as delivering meals to seniors, you can deduct the fair-market value (check Kelley Blue Book at kbb.com).
Only a handful of charities use donated cars, and they’re more particular about the cars they’ll accept. Still, it’s worth seeking them out, and not just because you’ll get a bigger tax deduction.
Other charities often contract with third parties to sell donated cars and receive only a fraction of the proceeds.
Because of previous abuses, donations of used cars and other noncash items might attract extra scrutiny from the IRS. So keep scrupulous records.
Get a written acknowledgment from the charity showing your name and taxpayer identification number the vehicle identification number, and the date of the contribution. If your deduction exceeds $500 and the vehicle was resold by the charity, you’ll need a written acknowledgment from the charity showing proceeds of the sale.
If you give to a charity that doesn’t sell donated vehicles (or resells them to needy individuals for significantly less than the fair-market value), ask for a statement from the charity certifying that the vehicle will be used as part of its mission.Sandra Block is a senior associate editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to moneypower@ kiplinger.com. And for more on this and similar money topics, visit kiplinger.com.