How to Get the Biggest Tax Refund for Your Car Donation
There aren’t many options available when it’s time to part with a beloved (or hated) vehicle. You can trade it in, sell it to a dealer or private party, give it to a friend, or consider a car donation in exchange for a tax deduction. Many well-advertised companies claim to make car donation easy, quick, and profitable, but they may not be as beneficent as they seem, and some might even lose you your tax deduction completely. Before you donate your car to charity, take the time to consider the pros and cons, and see if vehicle donation is right for you and your favorite charity. The following are a few important issues that may arise, and tips for how to arrive at the best tax refund results for you and your charity of choice.
Today Money puts it this way: “If you still feel compelled to use an intermediary organization– possibly because you’re busy– ask the organization how much of the car’s value will go to charity. If the organization simply gives charities flat fees… your donation may not be eligible for a tax deduction.”
To qualify for a tax deduction, the organization must be listed as a 501 (c)(3) not-for-profit tax entity. Most religious organizations, such as churches, synagogues, mosques, and temples, qualify as non-profits with the IRS. You can check this status by contacting the organization directly, or by using the IRS Exempt Organization Select Check website.
Some charities are more familiar with the ins and outs of car donation than others. In fact, your favorite non-profit may refuse to accept vehicle donations, because auctioning them off requires a huge investment of valuable staff time and resources. If this is the case, Charity Navigator offers the following advice: “If your charity doesn’t accept cars, take the time to find a charity that does, and still does work that you respect.” That way, you can ensure that your donation benefits the cause, people, or place you care about most, and that you get the tax deduction you expect. If your heart is set on helping a specific non-profit that does not deal in vehicle donations, consider selling the car yourself, and donating a portion of the proceeds to the organization you love.
2. Keep the Paperwork Safe and in Order for Tax Time.
Once the title has been transferred to a charity, your car will most likely be auctioned off. Afterward, you should receive a document that informs you of the selling price, usually on Form 1098-C. You will need this to claim the deduction on your next tax return. Depending on the value of the donation, you may need additional forms and documents.
Under $500: If your car is valued less than $500, you only need a receipt from a nonprofit organization, stating that the charity received the vehicle. You can report the dollar amount at fair market value, found in the Kelley Blue Book.
Over $500: TurboTax advises that you will need Form 8283 to file a deduction for a car that sells for between $501 and $5,000.
Over $5,000: If your car is valued at over $5,000, you will need a written appraisal stating the exact amount. You must also complete Section B on your tax return.
If the charity chooses to use the vehicle you donate, or to sell it to a low-income family at a reduced cost, you can list the deduction at fair market value.
3. Consider Your End Goal Before Donating.
A. My goal is to make or save money with a large tax deduction.
In this case, car donation is probably not the best way to go. Consumer Reports advises, “If your marginal tax rate is 28 percent, a donated car worth $2,000 will generate a deduction of only $560. You could get more by selling the car yourself.” Many people believe they will receive the entire value of the car as a deduction, and are disappointed to find they only receive a fraction of that number. Your exact percentage depends on your tax bracket. A tax professional can advise you on your particular return.
B. My goal is to help a charity by giving away a car I no longer need, and receive a reasonable deduction on my taxes.
Car donation may be right for you. It can be a great way to help an organization that accepts vehicle donations. Try to work directly with the charity, and not with a third party organization, which may only pass on a small portion of the proceeds to your preferred organization. According to Today Money, “To help the charity maximize the benefit of your donation, drop the car or boat off yourself.” This saves your chosen non-profit the expense of paying someone to pick up your donation. Be sure to keep track of all your paperwork, and pay attention to details, so that you are not disqualified from a tax deduction.
4. Always Transfer the Title.
Getting rid of a vehicle is tricky business, unless you plan to simply trade it in for a new one. Selling over the internet carries risk of theft, fraud, and potential damage to your car. Donation can be beneficial to both you and the organization you choose, but it poses risks of its own. You must be careful to ensure that you have no further legal or financial responsibilities for the vehicle, once it is out of your care. Otherwise you may find parking tickets and registration fees addressed to you, for a vehicle you no longer drive. If you do not have the title, or if there are liens or probate issues attached, transferring ownership may require time, funds, and effort.
Charity Navigator warns, “Some charities will ask you to leave the assignment of ownership space on the charity donation papers blank, so they don't have to re-title the auto. If your charity asks this of you, find another charity.” To protect yourself, be sure to re-title the car to the charity of your choice, and get a receipt upon transfer. This receipt should include, at minimum, “your name, the vehicle identification number, the date of your donation and a statement describing the goods and services you received, if any,” according to TurboTax. Also, cancel your insurance on the vehicle, and notify the DMV in your state of the transfer.
Help a Charity You Love.
Car donation is a big decision with many potential pitfalls on the way to tax deduction time. But if you do it methodically and carefully, and keep track of all the important details along the way, it can be a rewarding experience both for you and for a very lucky organization.
You may have a wonderful non-profit right in your own backyard, just waiting for your call.