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 (if any) to be well below the car's true value.
But the alternative of selling the car on your own involves the expense of
advertising as well as the commitment of time needed to meet with potential
buyers, accompany them on test drives, negotiate a fair price, etc.
For these reasons, some taxpayers consider a different option
for their old cars: donating them to charity. An increasing number of charities
have turned to car-donation programs. You may have seen ads from some of these
organization in your local newspaper urging individuals to donate their old
cars. The donation approach saves you the trouble of trying to sell the car.
Many charities offer the added convenience of picking up the car at your home.
In taking this approach, however, bear in mind that the amount
of the deduction you will be allowed to claim is subject to special
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 lesser of
the vehicle's fair market value or the amount for which the charity actually
sells the car, if it sells the car without materially improving it. This limit
applies to any motor vehicle designed for road use, including vans and trucks,
as well as to boats and airplanes.
Since most charities do sell the cars they receive, it's likely
that your donation will be limited to the actual sale price. 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 (see
below).
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. The IRS will accept
the value in the "Blue Book" or another established used car pricing
guide if the guide lists a sales price for a car that is the same make, model,
and year, sold in the same area, and in the same condition, as the car you
donated. In some cases, this value will exceed the amount you could actually
get on a sale.
However, if the car is in poor condition, because it needs
substantial repairs or is unsafe to drive, and the pricing guide only lists
prices for cars in average or better condition, the guide won't set the car's
value. Instead, you must establish the car's true market value by any
reasonable method. Many used car guides show how to adjust value for items such
as accessories or mileage.
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.
Make sure the charity qualifies
and is legitimate. You
won't be entitled to a charitable deduction unless you donate your car to an
eligible charitable organization. In some cases, the transaction is more
complex because private fund-raisers may be operating car donation programs on
behalf of charities. This is legitimate as long as the private company is
acting as the agent for a qualified charity. We can help if you have any doubts
about the qualification of any donee you are considering.
Proving your right to the
deduction. 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 should provide you with this
acknowledgement within 30 days of the sale.
If, instead, the charity will use (or materially improve) the
car, the acknowledgement needs to certify the intended use (or improvement) and
the intended duration of the use, along with a statement that the car will not
be sold before completion of the use or improvement. In this case, the
acknowledgement should be provided within 30 days of the donation.
Please contact us with any questions on how donating a car could
benefit your 2020 taxes.
