There are many ways you can provide benefits to your favorite charity other than simply donating cash (although that is certainly appreciated, too). For instance, you can donate property such as a car or other vehicle that may be used to further the charity’s tax-exempt function. Of course, you are entitled to a charitable deduction for the gift.
However, if you are not careful, you could wind up with a deduction for an amount less than the car’s fair market value (FMV) ... or even no deduction at all. The deduction is based on a tax law change that went into effect after 2004.
Background: Previously, the rules in this area were more favorable to taxpayers. All you had to do was arrange for the charity to receive the car, drop it off and then claim a deduction based on FMV. An estimated value for each make and model is listed in Kelley Blue Book (KBB) and similar car-buying guides.
But the IRS noticed that taxpayers were being overly aggressive in claiming charitable deductions for vehicles. Typically, they would inflate the FMV without any substantiation as to the vehicle’s condition or worth. This forced Congress to tighten up the rules.
Under current law, if you use a buying guide such as KBB to set the vehicle’s FMV, the deduction may be reduced if the charity then sells the vehicle, a frequent occurrence. For example, if you state that the FMV of a car is $5,000 when you donate it and the charity subsequently sells it for $3,500, your deduction is limited to $3,500. Another tax law change: If you claim a deduction of $500 or less for a car, the deduction is equal to the lesser of $500 or the FMV.
The charity must provide you with written substantiation of the deduction value within 30 days of your contribution or, if it sells the vehicle, within 30 days of the sale. Save this documentation as proof in case the IRS ever challenges the deduction amount. If you have not heard from the charity within 30 days of a vehicle donation, contact the organization immediately to obtain the written statement.
Generally, deductions for vehicles are lower than they were prior to these tax law changes. One consolation: If the charity materially improves the vehicle for its own use—for instance, it repairs a bent fender or installs a new feature such as a rear-view camera—you can still deduct the vehicle’s FMV. Depending on your situation, you might search for a charitable organization willing to fix up the vehicle for its own use.
Finally, other rules may apply to charitable deductions, such as a reduction for certain high-income taxpayers. Consult your tax adviser before you drop off the keys.