Options When You Choose to Donate a Car for Tax Deduction Purposes

It's hard to read the paper or listen to radio and not hear ads for charitable vehicle donation - regardless of their claims, it take some effort on your part to donate a car for tax deduction purposes and benefit everyone involved. Of course, that's exactly what's supposed to happen, but in practice, agents that handle car donations for charity (and buy those ads) can come out far better than everyone else in such a transaction.

Being able to get your charity of choice the best deal possible, when you donate a car for tax deduction purposes, will also increase the amount you would be able to subtract from your income when figuring your taxes. It is to your advantage to find a charity that can use your vehicle directly, rather than selling it off. Even if they donate it to an individual or family in need, you are allowed to deduct the fair market value of your vehicle, as they would have paid if you had you sold it to them directly.

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*Tax Tip: Contributions must be made to "qualified" organizations, including religious, charitable and educational, as defined by section 501(c)(3) of the Internal Revenue Code. That's bureaucratic gobbledygook to most of us. Contributions are frequently made in respect to and/or in "loving memory" of human family and friends as well as animal companions. We are a non-profit charitable organization relying entirely on donations for support of our programs. Contributions of many kinds are welcomed.

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There was a loophole in the 1990's and early 'aughts that caused third-party, for-profit agents to skim as much as 70% from each vehicle transaction at auction. The reliance upon wholesale auction was further complicated by the for-profit reliance of such companies upon economies of scale. Without the help of volunteer labor, it would cost to much to take the time in finding a retail sale. Thus, the vast majority of donated cars, for tax deductions, were forwarded to the wholesale market.

This practice was noticed by independent reporters and the US General Accounting Office. This meant that there was a large discrepancy between the amount claimed as "fair market value." Nearly $700 million in discrepancies were found in the year 2000, for instance. Since 2005, for those who've donate cars, tax deductions have been seriously limited and include additional filing requirements.

The fair market value continues to be the price at which you could reliably expect to sell your car for, person-to-person and without any pressure to complete the transaction on either end. Such a retail sale may be an order of magnitude higher that that paid at wholesale auction. In the case of a donated car, tax deductions may not even be worthwhile unless the return on your donation is increased by considering its ultimate fate.

And honestly, you don't want to see your $3,000 sedan that you've spent so much time in be sold for $30 at an auction, tossed on the back of a truck and shipped to a far-off state for dismantling. Wouldn't you prefer your car "lived on" with someone else? It's hard to get rid of a car, but at least when you donate a car, tax deductions and the intangible good feeling of donating to someone less fortunate can ease your car-guilt.

Aside from being environmentally unfriendly when long haul transport is considered, there is the matter of a very small sale price. According to the latest guidelines, when you donate a car to charity, the tax deduction is limited to the amount it was originally sold for, if the car is sold during the first two years after you donate it.

After you decide to donate a car, tax deduction considerations behoove you to do a little calling around and find a local non-profit organization that can actually use your car as part of it's IRS-approved, charitable mission.

You will find that very few charities conduct their own car sales. However, educational operations often sell a well-refurbished vehicle at charity auctions. Such sales often command a price even higher than the fair-market value, even though one is limited by the extent of the (your) donation rather than what they did to spiffy it up. Donated cars for tax deductions are certainly not the most lucrative beak on one's tax burden (credits are usually worth about 3 times as much), but they can be very useful. Get the most out of yours and help some people in your neighborhood.