What Happens When You Donate A Car For Tax Deduction Purposes
It’s hard to read the paper or listen to radio and not hear ads for charitable vehicle donation – regardless of their claims, it take some effort on your part to donate a car for tax deduction purposes and benefit everyone involved. Of course, that’s exactly what’s supposed to happen, but in practice, agents that handle car donations for charity (and buy those ads) can come out far better than everyone else in such a transaction.
Getting your charity of choice the best deal when you donate a car for tax deduction purposes will also increase the amount you’re able to subtract from your income when figuring your taxes. It is to your advantage to find a charity that can use your vehicle directly, rather than selling it off. Even if they donate it to an individual or family in need, you are allowed to deduct the fair market value of your car, as they would have paid if you’d sold it to them directly.
There was a loophole in the 1990′s and early ‘aughts that caused third-party, for-profit agents to skim as much as 70% from each vehicle transaction at auction. The reliance upon wholesale auction was further complicated by the for-profit reliance of such companies upon economies of scale. Without volunteer labor, it cost to much to take time finding a retail sale. Thus, a vast majority of donated cars for tax deductions were sent to the wholesale market.
This practice was noticed by independent reporters and the US General Accounting Office. This meant that there was a large discrepancy between the amount claimed as “fair market value.” Nearly $700 million in discrepancies were noted in 2000, for instance. Since 2005, for those who’ve donate cars, tax deductions have been seriously limited and include additional filing requirements.
The fair market value continues to be the price at which you could reliably expect to sell your car for, person-to-person and without any pressure to complete the transaction on either end. Such a retail sale may be an order of magnitude higher that that paid at wholesale auction. In the case of a donated car, tax deductions may not even be worthwhile unless the return on your donation is increased by considering its ultimate fate.
You don’t want to see your $3,000 sedan that you’ve spent so much time in be sold for $30 at an auction, tossed on the back of a truck and shipped to a far-off state for dismantling. Wouldn’t you prefer your car “lived on” with someone else? It’s hard to get rid of a car, but at least when you donate a car, tax deductions and the intangible good feeling of donating to someone less fortunate can ease your car-guilt.
Aside from being environmentally unfriendly when long haul transport is considered, there is the matter of a very small sale price. According to the new guidelines, when you donate a car, the tax deduction is limited to the amount it was sold for, if the car is sold during the first two years after you donate it.
After you decide to donate a car, tax deduction considerations behoove you to do a little calling around and find a local non-profit organization that can actually use your car as part of it’s IRS-approved, charitable mission.
You will find that very few charities conduct their own car sales. However, educational operations often sell a well-refurbished vehicle at charity auctions. Such sales often command an price even higher than fair-market value, though you are limited by the extent of your donation rather than what they did to spiffy it up. Donated cars for tax deductions are certainly not the most lucrative beak on one’s tax burden (credits are usually worth about 3 times as much), but they can be very useful. Get the most out of yours and help some people in your neighborhood.
Car Donation Deductions and Your Tax Bill
Not all car donation deductions are created equal – there are even cases where donating an auto in good faith can actually increase your tax owed under certain circumstances. Like anything else involving the IRS, the burden of proof is upon you, so the more information and documentation you have to back up your car donation deduction, the better.
Thankfully, just as rules have tightened up for donors, the onus of documenting the ultimate use or destination of a donated car rests with the charity receiving your car donation. Deductions are now tied to the ultimate use of the vehicle. So, if the charity you choose or, the third-party (often for-profit organization) that acts as an intermediary between yourself and said charity, sells your car at a loss, you’d have a hard time claiming fair market value for such a donation. The charity is required to give you a receipt stating the use of the vehicle within 30 days of donation, whether it’s actually met its final fate yet or not. If it is used and later sold, you’ll receive a new receipt outlining this use, too.
On the other hand, if the charity you choose has a mission that includes using the donated vehicle to further their mission or they sell it at a loss to a needy family, you may still claim the “fair market value.” This may, however, get your return some unwanted attention that you may not welcome for other reasons. If this doesn’t sound like a good idea to you, it may be wise to consider something other than car donation for deduction purposes.
Indeed, it pays to be careful of who is receiving your donated auto. This is especially true in the case of car donations and deductions taken from charities that are not recognized as non-profit organizations by the IRS. This is easily checked, and doing so can save you a great deal of heartache later. Charities are required to provide you with information regarding their non-profit status with the IRS and tax ID numbers you can check yourself with the IRS website.
Perhaps the most common happenstance where it doesn’t pay to donate a car is when the rest of your allowable deductions for a given year, when added to the car donation deduction, add up to less than the standard deduction allowed you. Of course, this differs depending upon how you file.
For instance, if you file as a head of household you’ll have to come up with nearly $2,500 more than if you’d filed as single or married filing separately to reach that standard deduction amount. This can be difficult for those who are simply working for a living as opposed to those who are self-employed.
It is also useful to note that the higher your tax bracket, the less a deduction will actually take off your total tax burden. This is because deductions are taken from your net income, not the total tax as many suppose. As such, legitimate car donation deductions are typically worth about a third after figuring out taxes, less if you’re in a higher tax bracket.
That said, in the case of a high value car donation, deductions can make the difference between paying in a higher or lower tax bracket. This can have important implications on your total tax burden that far outstrip the actual value of the car donation. Deductions may, on the other hand, have little or no effect on your final income bracket.
It’s always best to check and see how close you are to the edge of a more favorable income bracket near the end of a given year. Since you’re allowed to make donations up until the 31st of December, as long as you get a certificate of receipt, it doesn’t even matter if the car is hauled away until the next year, as long as you have a piece of paper stating that the initial transaction occurred before the 31st.
However, the regulations that govern how car donation deductions can be valued have seriously impacted the once booming market of car donation. Deductions have fallen sharply as well, and it is estimated that the IRS is now saving more than half a billion dollars per year in reclaimed revenues. Aren’t you glad you could help? You should be if your car donation deduction is actually a liability under the new rules.
