Donate a Used Car to Charity without an IRS Audit
Ugur Akinci, PhD
May 11, 2007
You win because not only you get rid of a burden for which you pay insurance and registration fees (plus, property tax if you are living in a state like Virginia), but you also earn the right to deduct it from your income tax.
The charity also wins because it gets clear title to an asset that they either sell to generate revenue or use it for their daily operations.
Deducting the value of a donated vehicle was easy years ago when most people simply deducted some sort of "fair sales value" of the car or truck from their income taxes, regardless of what the charity did with the vehicle.
All that has changed in 2005. Now, the U.S. Department of Treasury and the IRS have more stringent requirements for deduction, in compliance with The American Jobs Creation Act (AJCA). If you do not comply with these regulations, you might get an IRS audit. So it pays to be careful.
Here are some issues that you should consider:
1) What did the charity do with your donated vehicle? If they sold it, then the actual sales price of the vehicle is also the maximum you can deduct from your taxes.
This means it probably is not a very good idea to donate your vehicle in March or early April because that would not allow enough time for the charity to sell the vehicle. You should give them at least six months to do that. That's why I believe Summer or Fall is a better time to donate your vehicle in order to deduct its sales price from your taxes come following April.
Remember, since most charities sell the donated vehicles at wholesale prices, do not expect to get a "top value" for your vehicle. It is not unusual for a used vehicle to sell for $100 or less to a car wholesaler. If that is the case, then you would also be allowed to deduct only $100 or less from your income tax.
2) If your vehicle is used by the charity in their daily operations, you can deduct its "fair market value" but it has to be a "significant intervening use." For example, if the charity is using your donated vehicle to deliver meals-on-wheels and registers over 10,000 miles a year, then that counts as a "significant intervening use."
3) You can also deduct the "fair market value" if the charity has made repairs and improvements that significantly increased the value of the vehicle. And a paint job or new tires do not count as an "improvement." A new engine or transmission would be more like it.
4) You can also deduct a "fair market value" if the charity, instead of wholesaling it, gives the vehicle to a poor person either for free or well below its market price.
5) And here is how "fair market value" is defined… Usually, most standard car price guides like Kelley Blue Book lists three prices for a vehicle, independently of its condition: Trade-in, Private-Party, and Dealer Retail. If the above conditions apply, you can deduct the PRIVATE-PARTY price from your taxes.
CHECK LIST:
You need a written letter of donation from your charity if the vehicle's value is over $500.
These are the forms you need to use to deduct your vehicle's worth from your taxes: IRS Form 1098-C (Contributions of Motor Vehicles, Boats, and Airplanes) and Form 8283 (Noncash Charitable Contributions).
If you claim that the value of your donated vehicle is over $5,000 then you need a written independent appraisal to back up your claim.
If you'd like to read the whole Treasury Department regulation on this issue you can visit http://www.treas.gov/press/releases/reports/not155419041.pdf
And if you would like to check whether the charity you are making a vehicle donation to is accepted by the IRS or not, you can do so easily at http://apps.irs.gov/app/pub78
DISCLOSURE: The author is not an attorney, CPA or a professional tax consultant. Please consult your CPA or attorney before making a final decision on how to donate your vehicle.
(Photo by Infrogmation. Published under GNU Free Documentation License. Source: http://commons.wikimedia.org/wiki/Image:Broadmoor9Janu06SubmergedChevy.jpg)
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