Tax Rules for Donating a Used Car to Charity

How to Donate a Car to Charity?

There are special tax rules that one can use to donate a used car to charity and receive a tax deduction.  For most taxpayers, there are many advantages to the car donation approach because it avoids the hassle of selling a used car on the open market. Donating a car can also result in a beneficial charitable contribution deduction. The car donation process is simple.

 

Tax Rules for Donating a Used Car to Charity

All you need to do is call the charity and someone will come and pick up your vehicle, or tell you where to bring it. However, with so many charities to choose from and so many people trying to scam the innocent, picking the right organization is not always easy.

 

Charitable Deductible Limitations

However, the amount of the charitable deduction you will be allowed to claim is subject to special IRS limitations. In many cases, the tax deduction you can claim on donating the used car is less than the car fair market value. Many times is may be better to take the dealer’s offer on the car.

For cars worth over $500, the deduction will be 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.

 

Charitable Deduction for Car Info

Since most charities actually sell the cars they receive, it’s likely that your donation will be limited to their actual sale price.  Taxpayers must then wait until the car is sold to find out the amount of the used car tax deduction that they can take. Often, the value will be low because the charity sells the car at auction.

A taxpayer can only get the fair market value of the car as a tax deduction at the time of donation if the charity uses the car in their services. In that case, fair market value is usually set according to the  blue book listings for used cars. The IRS will accept the value in the blue book  or another established used car pricing guide.

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 will not be the final say on the car’s value. Instead, the IRS requires taxpayers to 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.

Taxpayer’s must itemize deductions to get the tax benefit; you can’t take a deduction for a car donation if you take the standard deduction.

 

Information about getting the used card donation tax deduction:

  • Making 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.
  • 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.

 

IRS Tax Forms for Car Deduction

If the car is worth more than $500, the donor must complete Section A of IRS Form 8283 and attach it to their tax return. Donors are required to file with his/her tax return a written acknowledgement from the charity. If the charity sells the car, the charity must provide the donor with a certification that the car was sold at “arms length” between unrelated parties and the sale price of the car within 30 days. In this case, the donor’s tax deductions will be limited to the total amount the charity sold the car for. If the charity does not sell the car, it must provide the donor with a receipt within 30 days of the contribution. The charity may also be required to provide certification to the donor stating how it plans to use or improve the car and stating that it promises not to sell or transfer the car.

 

Section B of IRS Form 8283

Penalties are imposed on charities that provide fraudulent acknowledgements to donors. If the car is worth $5,000 or more, an independent appraisal is necessary. The donor must also fill out Section B of IRS Form 8283. For cars worth less than $5,000, use the Kelley Blue Book, the Hearst Black Book, or a guide from the National Auto Dealers Association (NADA) to determine the market value. Make sure you use the correct figure for the date, mileage, and condition of your car. Picking the highest figure for your car model and year without taking into account other factors may not pass muster with the IRS.

Taking Charitable Deduction on Vehicle

If you are the title holder, you can contact the charity and explain to them you want the donation to be in one of your parent’s names. You have to sign & transfer the title.

Most vehicle donation programs use a 3rd party for-profit company. The company has a dealers license and charges a fee for selling, picking up and auctioning the vehicles.

 

Charitable Deduction on Salvage Vehicle

If it’s not running it will probably be salvaged. What happens is the salvage yards bid on the vehicles. If your car sells to the bidder for say $300, you are allowed to claim up to $500 if the FMV is $500 or more. If the vehicle is in fair-good condition, they are auctioned. If they car sells for more than $500 you can only claim the amount it was sold for. So if you donate a car and it sells at auction for $750, but the FMV is $1000, you can only claim $750. If your car sells for more than $500 you get a 1098-c, if it sells for less than $500 you don’t need one. The only thing that would make your donation $0 would be if your car is not whole, in which case it would never be accepted for pick up.

Limitations on Charitable Deductions

In general, a charitable contribution of tangible property is equal to the property’s fair market value. Treas. Reg. § 1.170A-1(c)(1). However, section 170(e)(1)(B)(i) provides that a donation of tangible personal property shall be reduced to its adjusted basis if the charitable organization (1) used the property in a manner that is unrelated to the organization’s charitable purpose, or (2) sold the property before then end of the taxable year. What can a taxpayer do to ensure that the charitable organization will not trigger any of these events?

 

IRS Limitations on Charitable Contributions

A contract the follows the principles of a loan covenant could be used, for example.

“I will donate this item to you on the premise that you are not to 1) use the property in a unrelated manner to your charitable purpose or 2) sell the property prior to the end of this taxable year. Should your actions trigger either of these events, the donated item shall be returned immediately. If the item is no longer available, the FMV of the item at the original time of the donation shall be forwarded to the donor. Any delay will result in interest being accrued”.

The taxpayer could place some conditions on the contribution–i.e, “wait a year before you sell this and make sure to use it for your charitable purpose.” But the purpose of using these conditions to gain the benefit of a charitable contribution seems a bit contrary to the definition of a charitable contribution within the meaning of section 170–that is, a donation of money or property without any expectation of return benefit.

 

Limitations on Charitable Deductions

The best solution would be to ensure that a well written contract is in place to define what is exactly happening with the charitable contribution and the property. This is the best way to ensure that documentation is in place to support the position if an audit were to occur in the future. This would prevent the taxpayer from accruing fines related to the charitable contribution.

 

Donating LEAPS Stock Options

Question: If I were to buy $1000 of stock, and it went up to $2000 in value, I would be able to donate the stock, claim a $2000 deduction, and report no capital gains.

Let’s say now that I purchase $1000 worth of publically traded stock options on the market. They go up to $2000 in market value, and I donate them. Do I report capital gains of $0 or $1000?

 

Donating LEAPS Stock Options

Answer: Your first example only works if you hold the stock for at least a year. If the stock is held for less than one year, you only get to deduct the lower of your cost basis of $1,000 or the stock’s value but you still report no gain,.

If you buy an option contract for $1K and it goes to $2K and you donate it, you have a chartiable contribution for $1k assuming you owned the contract for less than a year, or $2K if you owned it for 12 months or more, and no capital gain. Since publicly traded options typically have a life of less than a year, I don’t see how you would qualify to meet the one-year holding period.

Most charitable organizations probably wouldn’t accept an option donation. They generally have restrictions on what they can invest in and options (or any kind of derivative) is almost universally excluded.

They’d also be inclined to not accept it since they’d have to pay to exercise them (or alternately they’d expire worthless).

Tax-free Charitable IRA Distributions and Donations

It is possible for a taxpayer to make a tax-free IRA distribution to a charity to avoid paying certain taxes. Individuals age 701/2 and older on the date of the transfer can distribute otherwise taxable traditional and Roth IRA amounts directly to certain tax-exempt charities to save on their taxes. These tax-free charitable IRA donations will be considered qualified charitable distributions and the result is that they are federal income tax-free to the donor.

 

Making a Charitable Deduction

However, no charitable deduction is allowed on Form 1040. Qualifying distributions may be made only in amounts of up to $100,000 per year. Qualified charitable distributions to an IRA are payments of otherwise taxable amounts by an IRA trustee directly to a qualified public charity  The rule cannot be used for distributions from SEP accounts, SIMPLE accounts, or qualified retirement plan accounts.

Tax-free Charitable IRA Distributions and Donations

The end effect is that the tax-free treatment for a qualified charitable distribution ends ups giving the taxpayer an immediate 100% above-the-line deduction without any effect on the 50%-of-AGI limitation on cash contributions to 50% charities for these distributions. Also, the fact that qualified charitable distributions are not included in the donor’s AGI lowers the odds that he or she will be affected by various other unfavorable AGI-based tax provisions.

For more information, see the IRS Information on Charitable Donations from IRAs for 2012 and 2013

 

Additional Resources on Tax Free IRA Distributions to Charity:

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Do You Make These Year-End Contribution Mistakes?

Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years. Some of these changes include the following:

 

Special Charitable Contributions for Certain IRA Owners

This provision, currently scheduled to expire at the end of 2011, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, created in 2006, is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.

 

Do You Make These Year-End Contribution Mistakes?

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

 

Rules for Donating Clothing and Household Items

To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.

 

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

 

Reminders for Donations before year end

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:

  • Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2011 count for 2011. This is true even if the credit card bill isn’t paid until 2012. Also, checks count for 2011 as long as they are mailed in 2011.
  • Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, searchable and available online, lists most organizations that are qualified to receive deductible contributions. It can be found at IRS.gov under Search for Charities. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.
  • For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2011 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
  • For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
  • The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
  • If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
  • And, as always it’s important to keep good records and receipts.

 

Additional information on charitable giving including:

Charities & Non-Profits
Publication 526, Charitable Contributions.

10 Tips for Deducting Charitable Contributions

When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. Your donations could add up to a sizable tax deduction if you itemize on IRS Form 1040, Schedule A. If a taxpayer is donating to a qualified charity, this is a very important thing to get right.

You can deduct donations you make to qualified charities. This can reduce your taxable income, but to claim the donations, you have to itemize your deductions. Claim your charitable donations on Form 1040, Schedule A.

 

What are Qualified Charities?

  • Nonprofit religious group
  • Nonprofit educational group
  • Nonprofit charitable group

If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct contributions made to specific individuals, political organizations and candidates. See IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization.

 

Here are a few tips to ensure your contributions pay off on your tax return:

  1. Contributions must be made to qualified organizations to be deductible. You cannot deduct contributions made to specific individuals, political organizations and candidates.
  2. You cannot deduct the value of your time or services. Nor can you deduct the cost of raffles, bingo or other games of chance.
  3. If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.
  4. Donations of stock or other property are usually valued at the fair market value of the property. Special rules apply to donation of vehicles.
  5. Clothing and household items donated must generally be in good used condition or better to be deductible.
  6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.
  7. To claim a deduction for contributions of cash or property equaling $250 or more you must obtain a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document from the organization may satisfy both the written communication requirement for monetary gifts and the written acknowledgment requirement for all contributions of $250 or more.
  8. If you claim a deduction of more than $500 for all contributed property, you must attach IRS Form 8283, Noncash Charitable Contributions, to your return.
  9. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which requires an appraisal by a qualified appraiser.
  10. Contributions made for relief efforts in a Midwest disaster area receive special benefits. For more information, see Publication 4492-B, Information for Affected Taxpayers in the Midwest Disaster Areas.

 

10 Tips for Deducting Charitable Contributions

For more information on charitable contributions, check out Publication 526, Charitable Contributions, which is available below or by calling 800-TAX-FORM (800-829-3676).

Contributions are deductible in the year made. That means donations charged to a credit card before the end of 2014 are deductible in 2014, even if the credit card bill isn’t paid until 2015. Also, checks mailed on or before Dec. 31, 2014 are deductible for 2014. Many taxpayers aren’t even aware that there are limits on charitable contributions but they do exist. If you contribute more than 20% of your adjusted gross income (AGI, found on line 37 of your form 1040), pay attention to limits. The specific limitations can be fairly complicated – with numerous exceptions – but here are some quick rules of thumb: you can deduct appreciated capital gains assets up to 20% of AGI; you can deduct non-cash assets worth up to 30% of AGI; and you can deduct cash contributions up to 50% of AGI. If you exceed those limits, you can carry the deduction forward for five years.

 

Additional IRS Resources on Charitable Deductions:

 

IRS YouTube Videos on Charitable Tax Deductions: