by Michael Wiener, E.A.
Over the years my clients have asked me about donating their car or other vehicle to charitable organizations. The tax benefits for making such a charitable contribution are real enough but they come with some strings attached. If you aren’t careful, you could end up with a deduction that is lower than the one you bargained for – or no deduction at all.
In the past, donating cars to charity was a win-win situation for the donor and organization, even if you were giving away a lemon. All you had to do was arrange the pick-up or drop-off, refer to an auto-buying guide like Kelley Blue Book (KBB) and then deduct the car’s fair market value based on the figures in the guide. But taxpayers got greedy – as they tend to do – and often overstated these values on their tax returns, so Congress felt compelled to tighten up the rules in 2004.
Under current law, no deduction is allowed for a car with a value of less than $500. If you use a buying guide such as the KBB to set the car’s fair market value, the deduction may be reduced if the charity turns around and sells the vehicle, as many likely do. For instance, if you have valued the car at $5,000 and the charity sells it for $4,000 your deduction is limited to $4,000.
Within 30 days of the charity selling the vehicle, it must provide you the selling price on Form 1098-C (Contributions of Motor Vehicles, Boats, and Airplanes). This is the proof you’ll need if the Internal Revenue Service ever challenges the deduction amount. If you haven’t heard from the charity within 30 days, get on the phone pronto to secure the necessary paperwork.
For the most part, deductions for vehicles will be lower than the amount of the fair market value. But there’s one silver lining in the tax rules: If the charity “materially improves” the vehicle for its own use – for instance, it repairs a bent fender or installs a new feature like a navigation system – you can still deduct the car’s fair market value.
The best approach is to not to jump at the first opportunity to donate a car to charity. It may pay to search for an organization that will agree to fix it up and use the vehicle for its stated charitable purposes.
If you should have a topic that you would like me to
discuss or if you should have a question, please feel free
to call 239.403.4410 or e-mail me at
An enrolled agent, licensed by the US Department
of the Treasury to represent taxpayers before the IRS
for audits, collections and appeals. To attain the
enrolled agent designation, candidates must demonstrate
expertise in taxation, fulfill continuing education
credits and adhere to a stringent code of ethics.