Donating your junk car is a “win-win-win situation:” It’s a great way to get the car off your hands, support a worthy cause, and benefit from a tax-deduction – all at the same time!
However, unless you itemize your deductions, you won’t actually benefit come tax time. In this post, we outline exactly what to do before donating your car in order to ensure you receive the tax credits you deserve. You can get more information from the IRS’ guide to vehicle donation.
How Do Tax Deductions Work When Donating a Car?
First, in order for your donation to count as a tax deduction, you’ll need to donate your car to a registered 501(c)(3) organization or tax-exempt religious institution. You can verify the charity’s eligibility by visiting the IRS website.
When you donate a car, the IRS calculates the value of your tax deduction based on how the charity uses the car.
1. If the charity sells the car, your deduction is valued at the sales price.
2.In all other cases – such as if the charity uses the car for internal purposes or sells it at a steeply discounted price to a person in need – your deduction equals the car’s fair market value.
Four Steps to Understanding and Claiming Your Fair Tax Deduction
1. Find Out the Car’s Selling Price
Most charities will report the sales price of your car on Form 1098-C. Use that price as the amount of your deduction. For example, if the charity sells the car for $2,000, you must claim $2,000, even if the fair market value is $3,500.
Note that if the charity sells your car sells for $500 or less, you may deduct $500 or your car’s fair market value, whichever is less. For example, if your car’s fair market value is $550 but sells for $250, you can deduct $500.
2. Determine the Car’s Fair Market Value
3. Claim the deduction
In order to claim a deduction for your donated car, you must have documentation of your donation. At a minimum, the documentation you receive from the charity must include:
The vehicle identification number
The donation date
A statement describing any goods and services you received
Report the amount of your deduction on Schedule A. Since you can only claim a deduction for your car donation if you itemize, the total of all your eligible expenses on Schedule A must exceed the standard deduction amount for your filing status.
4.File the Proper Tax Forms
You’ll need to file the following additional documents with your tax return, depending on how much you can deduct:
- $500 or less: Nothing in particular, but hang on to your records in case you’re audited.
- $501 to $5,000: File Form 1098-C or the written acknowledgement, plus Section A of Form 8283.
- More than $5,000: File Form 1098-C or the written acknowledgement, plus Section B of Form 8283 and the written appraisal of the vehicle at least 60 days before you donate the car if the charity isn’t selling it.
It’s All Good!
The bottom line is that donating your car is an easy way to support a charity that’s important to you, while allowing you to claim a tax deduction. Just be sure to take all of the above steps to ensure you do it right. Remember that even your old junker may qualify as a donation since charities can sell it to a scrap yard.