Donating Used Cars

So, you’re in the market for your next used car, and after doing your research (primarily reading the many informative, witty articles on this website) you’ve decided to purchase your next used car through a public car auction. Good for you, you’ve made an informed decision.

Now your next decision: what to do with your old car. That depends on what kind of shape it’s in. If you’ve had your car for 15+ years and put hundreds of thousands of miles on it, and if there’s more rust showing than actual paint, you have one of two options: Sell it to an 18-year-old pimply kid so he can get to his job at White Castle, or donate it to charity.

Donating to charity is always a good thing. But thanks to some very greedy people in years past, who claimed their car was worth way more than it actually was, tax law changes were put into effect which have dramatically limited deduction amounts for some donated vehicles. The precise tax break depends on the donor's claimed value of the gift and how the charity uses the vehicle.

Donation rules to follow:

1. All used car donations must be made in the tax year for which you are filing the return. To claim a donated auto on your current tax return, you must have given the vehicle to a charity by last Dec. 31.

2. In order to receive a tax credit, the charitable organization you choose to donate to must be approved of by the IRS. Ask to see copies of the group's federal tax-exempt status documents. You also can check out the IRS's Web site directory to see if the charity is on the approved list or peruse GuideStar's registry, which provides information on more than 850,000 U.S. nonprofit organizations.

3. To write off your auto gift, you must itemize instead of claiming the standard deduction. That means you have to keep track of what you give and file the long Form 1040 and Schedule A. If your old car is the only deduction you can claim on Schedule A, giving it to a charity may not be worth it from a tax standpoint.

4. In most instances, a taxpayer must take into account a $500 threshold on vehicular gifts. This value amount applies to autos, boats and even airplanes. When the donated vehicle's value (based on credible fair market value analyses) exceeds that amount, claiming the deduction gets more complicated.

5. The new law, however, does provide a few exceptions that will allow a giver to claim the auto's fair market value. Say you donated your $1,000 station wagon to a food bank. Instead of immediately selling it, the group used the auto for several months to deliver meals and other food items to needy families. Eventually, the organization decided to sell the vehicle for $800. In this case, you could still claim the full $1,000 fair market value of the auto as long as you received documentation from the food bank on not only the sales price, but how the auto was used for nonprofit works before the sale. Under the IRS regulations, this is classified as "significant intervening use" of the vehicle that allows the taxpayer to claim the higher deduction.

6. Keep in mind that regardless of how a charity disposes of your donated vehicle, your deduction cannot exceed the value of your donation. So if you donate a clunker worth $150, that is the amount you can deduct even if the charity gives the auto away.