It’s time to get a new vehicle. Or you’ve got an extra car or SUV sitting in the garage gathering dust. If it’s not late-year or low-mileage you may have trouble selling it privately. And you probably won’t even get anywhere near its blue book value if you try to trade it in.
Before 2018, another option--donating it for a charitable deduction--was a relatively easy decision to make. But today it’s much more complicated. Why? Because of the new tax laws.
Higher itemized deduction hurdles
Starting in 2018, the standard deduction for married couples filing jointly has been raised to $24,000 for couples and $12,000 for singles or couples filing separately. While this higher deduction benefits most taxpayers, the new $10,000 limit on state tax deductions and tougher rules on deducting mortgage and home equity loan interest are making it more difficult for many people to amass total itemized deductions that exceed these thresholds.
If donating your car, truck or SUV could lift your itemized deductions over the $24,000/$12,000 barrier, you may want to do it while it still retains an attractive tax-deductible value. But keep in mind that the higher the deduction the more effort and paperwork will be required by both you and the charity.
Still interested? Assuming the numbers work for you, the process of donating a vehicle generally takes three steps:
- Determine the fair market value of your car;
- Find a qualified charity that will take it; and
- Obtain the necessary documentation to complete the donation.
Let’s take a closer look at what may be involved at each step.
Determine your vehicle’s fair market value
Before you donate your vehicle you must first determine its fair market value (FMV). The FMV represents the maximum deduction you may take on your federal income tax return.
Certain commercial firms and trade organizations publish monthly or seasonal guides for different regions of the country that contain dealer sale prices or average dealer prices for recent model cars. While these prices are not "official" and the publications are not considered appraisals of any specific donated property, they do provide clues for making an appraisal and suggest relative prices for comparison with current sales and offerings in your area.
However, FMV may be affected if your vehicle has engine trouble, body damage, high mileage, or excessive wear. For the FMV of your vehicle to be considered the same as the price listed for a private party sale in such a guide, that price must be for a vehicle that is the same make, model, and year as yours, and that is sold in the same area, in the same condition, and with the same or similar options, accessories, and warranties.
If the tax deduction you claim for your vehicle is greater than $5,000, you may need a written appraisal of its FMV from a qualified appraiser. The appraisal must be made no more than 60 days before you donate the vehicle.
Find a qualified charity
Your vehicle donation won't be tax deductible unless you give it to a qualified Section 501(c)(3) nonprofit organization. These are listed in IRS Publication 78. To determine if an organization is qualified, you can use the IRS’s online Tax Exempt Organization Search (TEOS) feature. Make sure to select “Pub 78 data” from the database list. Note that most churches, synagogues and mosques won't be on the list because they don't need to apply for Section 501(c)(3) status.
However, to be safe, before you make the donation contact the organization to make sure they are qualified and that they do accept vehicle donations.
Obtain the necessary documentation
Beyond having the title to provide proof of ownership, you’ll also need to document the vehicle’s deductible value. This can be relatively easy or complicated, depending on the amount you wish to deduct.
For deductions under $250
If the value of your deduction is less than $250, you’ll generally only need a receipt for the donation. A letter from the organization that shows the name of the organization to which you made the donation, the date and location of your contribution, and a reasonably detailed description of the car will usually suffice. You'll also need a record of the FMV of the car (and how you determined it) at the time of the contribution.
For all deductions between $250-$500
If you wish to claim a deduction of $250 or more, you'll need a contemporaneous written acknowledgment of your donation. In addition to information about the organization, the date and location of your contribution, and a description of the vehicle, this acknowledgement must include one of the following:
- A statement that no goods or services were provided by the charity in return for the contribution, if that was the case.
- A description and good-faith estimate of the value of any goods and services that the charity provided in return for the contribution.
- A statement that goods or services that the charity provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.
For all deductions over $500
If you claim a deduction of more than $500, the charity must use IRS Form 1098-C as the acknowledgement. In addition to specifying one of the “goods and services” conditions listed above, this form will indicate that the charity either:
- Is using or will use the vehicle to fulfill its charitable purpose and/or make repairs or improvements to the vehicle before transferring it.
- Gave or will give the car, or sell it for a price well below its FMV, to a needy individual in furtherance of its charitable purpose.
- Sold the car in an arm's-length transaction to an unrelated party (the date of the sale and the sale's gross proceeds will be listed).
If the charity elects either of the first two options listed above, it must send you Form 1098-C within 30 days of your donation; otherwise, it must send you Form 1098-C within 30 days after it sells your vehicle. You must attach a copy to your tax return.
Claiming deductions between $500-$5,000
If you wish to claim a deduction of more than $500 but less than $5,000, the value of your deduction will depend on what the charity does with your vehicle.
If the charity:
Your deduction value will be:
Sells the vehicle immediately
The lesser of:
It’s up to the charity to specify which of the situations applies in your situation, which they'll do in the Form 1098-C they provide to you. And you can’t take a deduction of more than $500 until they’ve provided the form. If they provide it after you file your tax return for the year of the donation, you may be able file an amended return that claims the deduction—but you must attach Form 1098-C to the amended return.
And if that wasn’t enough, you must also complete Section A of IRS Form 8283, Noncash Charitable Deductions, and attach it to your tax return.
Claiming deductions over $5,000
These deductions require the most amount of work and, depending on the situation, the involvement of outside parties.
If the charity will sell it in an arms-length transaction:
- The charity must provide Form 1098-C specifying the FMW.
- Both you and an authorized official of the charity must fill out and sign Section B of Form 8283.
Both forms must be included in your tax return.
If the charity will use the vehicle to fulfill its mission or give it or sell it at a discount price to a deserving individual:
- The charity must provide Form 1098-C specifying the FMW.
- In addition to you and the official of the charity, a professional appraiser must also complete and sign Section B of Form 8283 and provide a separate appraisal statement if you wish to deduct the FMW.
Is it worth the time and paperwork?
Considering the extra paperwork and time it may take to turn an unwanted vehicle into a significant tax-deductible donation, it’s a good idea to ask yourself if it’s worth the effort.
Start by listing all your other itemized deductions for the year—including other charitable donations--and then add your rough estimate of the FMW of the vehicle. If the total value of your itemized deductions exceeds the standard deductible, donating it may help lower your tax bill for the year.
If it’s not worth the effort, consider simply donating the vehicle without taking a deduction. You may not get the tax benefit, but at least you can feel good knowing that the organization will benefit from your generosity.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.
Dan Flanagan is a financial advisor located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or at [email protected]
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances.