Donating Vehicles to Charity
Atypical for our tax system, taxpayers are actually encouraged to help others through deductions. Here’s the latest tax information on donating vehicles to charity.
Traditionally, a taxpayer was given a windfall when donating a vehicle to charity. Regardless of the condition, one could claim a deduction for the fair market value of the car. Obviously, the fair market value of a car is a bit of a vague figure. Alas, the IRS has issued new regulations clamping down on unrealistic fair market value claims.
Under the American Jobs Creation Act, the method for valuing a vehicle donated to charity has changed. Instead of claiming fair market value, now you can only claim the actual sales price the charity gets when selling off the car. Put another way, the old rust bucket in the driveway just lost a lot of value for tax purposes.
It is unclear why a “jobs act” would have language related to vehicle donations. Alas, it does. Not only are you restricted to claiming the actual sales price of the vehicle as a donation, you must also take an extra step. You are now required to obtain and retain written and timely acknowledgment of the sales price from the charity of the sales price. If the IRS ever audits you, the receipt needs to be included in your records.
For the fortunate few, there are two exceptions to the new actual sales price rules. The circumstances that will give rise to the exceptions seem pretty far fetched, but you might be the lucky donor.
First, you can claim the fair market value as a deduction if the charity significantly uses the vehicle for its own purposes before selling it. For instance, if the charity uses it for a few months to deliver meals or carry out administrative needs, you get the fair market deduction. Make sure you get something in writing from the charity to back up the deduction claim!
Second, you can claim the fair market value deduction if the charity makes material improvements to the vehicle. Material improvements mean major repairs that significantly increase the value of the vehicle you’ve donated.
If you are fortunate enough to fall into one of these two exceptions, you need to know how to determine the fair market value of the vehicle. The IRS allows you to claim the blue book value for the car if it were sold to a private party. This will typically be far in excess of the actual sales price of the car.
Historically, donating vehicles to charity has been a great way to generate a tax deduction. While the new rules aren’t great, at least you can get some financial benefit for getting rid of your old vehicle.