We’ve all heard the commercial “Donate your car today …” If your motivation is to clear out a parking spot in the driveway, then that’s a very fast way to do it. If you are trying to claim a tax deduction instead of the hassle of selling the car, then continue reading.
Most people will receive very little, if any, tax benefit by donating their car to a charity with the catchy jingle. To claim the charitable contribution, you must itemize your deductions. When you file your tax return, you need to choose between a standard deduction, which ranges from $6,300 for an individual to $12,600 for a married couple filing a joint return, or itemized deductions. If you own a home and pay mortgage and real-estate tax, then most likely you will itemize your deductions, and receive some tax benefit for your charitable donations. In the past, most people who donated a car claimed blue book value of the car as the charitable donation. Using this option, when you gave a clunker that did not run, you could still claim that the car was in pristine condition. The Internal Revenue Service (IRS) wised up to the fact that people were claiming inflated charitable contributions, and charities did not receive a corresponding benefit.
The American Jobs Creation Act of 2004 put significant limits on the charitable deduction for donating a motor vehicle, boat or a plane. If the charity sells the donated vehicle, then the charitable contribution is limited to the actual sales price of the vehicle when sold by the charity. The deduction is further reduced by any incentive received from the charity. The charity is required to issue form 1098-C to the donor showing the sale price. Most cars donated to the charity with the catchy jingle, are sold at auction. The charity then uses the proceeds of the sale to further its goals. So if you donate a car with a blue book value of $5,000 and fair market value of $3,000 and the charity sells the car for $1,000, your charitable contribution is limited to $1,000. If you are in the 25% tax bracket, your tax savings from donating the car will be $250.
You can claim the fair market value of the vehicle in the following circumstances.
• The charity will make significant use of the vehicle. (My favorite charity that will make full use of the vehicle is the local fire department. Maybe, they will let you observe how they “use” it.)
• The charity will make significant improvements or major repairs to the vehicle.
• The charity gives or sells the vehicle to a needy individual significantly below market price.
So if one of the above situations applies, your charitable contribution in the example above will be $3,000 giving you tax savings of $750.
A better approach might be to trade in the old car when buying a new car. Many dealers will give you the fair market value of the car at trade in. So in the example above you will receive $3,000 towards the purchase of the new car. Further when you trade in a vehicle, you only pay sales tax on the difference between the final price of the new car and the trade in value of the old car. Assuming an 8% sales tax rate, that will save you an additional $240. This will give you an immediate benefit of $3,240 even if you do not itemize your tax deductions.
So next time, talk to your tax advisor, before taking tax advice from a catchy radio jingle.
–Leon Granovsky, CPA, Senior Tax Accountant