What To Do When You Donate Autos for Tax Deduction Purposes
The good news is that securing the correct paperwork when you donate an auto for tax deduction purposes should be simple. In fact, it should be automatic, but in some cases, you may have to remind the people who are handling your donation their obligations under the law. Since 2005, it has become far more straightforward to donate autos. Tax deduction levies, however, are a bit less for most donations than they were before then.
As such, it’s imperative that you not only secure your receipt of transaction but find out exactly what has happened to your vehicle. If it’s being used or fixed up for use, even if that includes a sale in the first two years after you’ve decided to donate. Auto tax deductions are now very closely tied to the ultimate use of the vehicle, so those which are sold wholesale within the the first few months, without an intervening use (other than paperweight or small greenhouse), can only use that sale price as the deduction.
Furthermore, the amount that actually goes to the approved charity in question is the amount you must not exceed when preparing your itemized deduction at the end of the year. It’s in your best interest to make sure that’s the figure you’ve gotten if there’s a third-party agent that is facilitating the transactions for the charity in question. When you donate an auto, tax deduction concerns are such that if anything is wrong at all you risk loosing the whole deduction and attracting the attention of an auditor.
Tax Deduction Paperwork
Thankfully, not only are there guidelines for what documents you should have, but also time-frames in which they must be sent to you. For instance, when you actually turn over the title and donate the auto, tax deduction paperwork should be set in motion. This means that if the intention of the agency is to turn around and sell as soon as you donate the auto, tax deduction paperwork should be forthcoming within 30 days of the impending sale.
Such sales usually take place within the first week or so after the vehicle is picked up. So, if it’s been two months and you’ve not heard anything, be sure and call the charity or third-party agent to find out what has happened with your car. Again, they are required to tell you their plans for your donated auto, a tax deduction range they expect (given that use) and when you should expect your paperwork in the mail.
If, on the other hand, you find out that your car is in good enough shape to warrant repair and use by a needy person or family served by the charity’s mission, there is not bill of sale to base your donated auto tax deduction calculation upon. In this case, you should be given a notice within 30 days of this decision that indicates this practical use of the vehicle as well as the appraised value.
If the car will be worth more than $5,000 this appraisal should come from an independent appraisal service (arranged by the charity or third-party agent) and be provided with a signed Form 8283, with a completed section B.
You should expect Form 8283 (section A) for any value between $500 and $4999.99 earned for your donated auto. Tax deduction paperwork then is simply a matter of filing these documents with your Form 1040 Schedule A itemized deduction worksheet.
If at any time you fell you’re getting the run around from any of the players in this game, a call to your State’s Attorney General, Secretary of State Office or the Better Business Bureau are good places to start an investigation of a potentially fraudulent donation service. If you’ve asked on more than one occasion for documents and they don’t arrive within the month, then you are officially getting jerked around with regard to your donated auto.
Tax deductions are not a big deal now that there is an existing framework for getting the documentation you need. Having a few pictures of the car as you’re getting ready to donate it are also handy. It never hurts to keep a few in your folder just in case.
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.
