Winner of the Well Workplace Small Business Award

 

August 19, 2007 -- I am in the market for a new car and am considering donating my old one. Can you help me weigh this option considering the tax benefits?

One of the negative aspects of buying a new car is the annoyance involved with getting rid of your old car. Many individuals find the trade-in allowance offered by dealers to be well below the car's true value and selling the car on your own involves the expense of advertising and a commitment of time.

For these reasons, some taxpayers consider a different option for their old cars: donating them to charity.

In taking this approach, bear in mind that the amount of the deduction you will be allowed to claim is subject to limitations. In many cases, the deduction you can claim is less than your view of the car's value. If you compare the tax savings from a donation with a dealer's trade-in offer, the offer may not seem as small.

For cars worth over $500, the deduction will be the amount for which the charity actually sells the car. Furthermore, these sales are often at auction or in bulk and typically result in sales below “Blue Book” value. Also, you won't know the amount of your deduction until the charity has sold the car and reported the sale proceeds to you.

Only if the charity uses the car in its operations or materially improves the car before selling it will your deduction be based on the car's fair market value at the time of the donation. In that case, fair market value is usually set according to the “Blue Book” listings for used cars published by the National Automobile Dealers Association.

In any case, you must itemize your deductions to get the tax benefit; you can't take a deduction for a car donation if you take the standard deduction.

You won't be entitled to a charitable deduction unless you donate your car to an eligible charitable organization.

If you donate your used car to charity, make sure you take the steps needed to substantiate your tax deduction.

If the charity sells the car, you will need a written acknowledgement from the charity containing your name and tax ID number, the vehicle ID number, a certification that it was sold at arm's length to an unrelated party, the gross proceeds of sale, and statement that the deduction cannot exceed the proceeds. The charity satisfies this requirement using Form 1098-C. The Form 1098-C is required to be provided to the donor within 30 days of the sale of the car. The donor must attach Copy B of Form 1098-C to his tax return. If, instead, the charity will use the car, the charity prepares Form 1098-C to certify the intended use and the intended duration of the use, along with a statement that the car will not be sold before completion of the use. The charity must provide the 1098-C to the donor within 30 days of the donation and the donor attaches it to his tax return.

Return to Tax Talk.