Shift Tax Gears on Car Donation

Are you thinking about donating a car or other vehicle to charity? If you give away the car without any strings attached, you might forfeit some extra-tax saving mileage.

Specify that the charity must use your vehicle in furtherance of its tax exempt-purpose. As a result, you can deduct an amount equal to the vehicle’s fair market value (FMV), subject to all the usual rules for deducting charitable donations.

Conversely, if you make no specific provisions and the charity sells the vehicle and collects the proceeds, your deduction is generally limited to the resale price. And, if the charity is inclined to simply “get what it can” for the vehicle, it’s likely to fetch a bargain-basement price. Therefore, you lose tax dollars on the deal.

At one time, you could deduct the full FMB of a vehicle you donated to a qualified charitable organization, even without imposing any special conditions. But not anymore. Under current law, if the vehicle’s value exceeds $500 and the charitable organization sells it, your deduction is limited to the amount received in the sale. (For a car valued at $500 or less, the deduction is equal to the lesser of $500 or the FMV.)

For example, if you donate a car with a Kelly Blue Book value of $10,000 and the charity subsequently sells it for $8,000, you can deduct just $8,000 not $10,000.

Note: If the charity materially improves the vehicle – such as repairing dents or installing new features like a nav system – or significantly uses the vehicle and certifies its use, you can still deduct the FMV.

In any event, be aware of these requirements when you donate a vehicle to charity:

  • The charity that received the donated car must be an IRS approved charitable organization qualified to receive deductible contributions.
  • The deduction is strictly limited to the vehicle’s FMV. That doesn’t mean the highest value listed in a used car buyer’s guide for the make and model without regard to other factors such as the vehicle’s condition.
  • The donation and the FMV must be properly documented. The recordkeeping requirements depend on the value claimed and the total amount of your annual charitable donations.

Where can you donate a car to charity? There are many organizations that advertise car donation programs. But it can’t hurt to do a little more research to find one that meets your needs. Above all, make sure that the organization qualifies as an IRS approved 501(c)(3) organization for tax deduction purposes.

Remember: You can only claim a charitable deduction for the donation of a vehicle if you itemize deductions on your personal tax return. Thus, you won’t get a deduction if you claim the standard deduction. (For 2020, a limited deduction of up to $300 in monetary contribution is available to non-itemizers.)

Finally, you must observe the usual record keeping requirements for charitable donations. Obtain a contemporaneous written acknowledgement from the charity.

If you’re claiming a deduction for property donations above $5,000, you will also need an independent appraisal.

Small Business Tax Strategies
October 2020