Car donation tax deductions sound complex and discourage many people from donating their car to a charity once they no longer need it. After reading this brief article, though, you will not be discouraged and you’ll understand the process.
About Car Donations
Most people donate a car to charity to give back to their community, but you also stand to benefit financially from donating your car. This is because it can help you save some money come tax time.
Usually, the Internal Revenue Service (IRS) requires you to calculate your deduction for a car donation in one of two ways based on how the charity uses your car donation. If the charity sells your car, you can only make tax deductions that are limited to the sales price. If the charity keeps the car, you can use the car’s fair market value to determine your tax deduction.
Tax Categories for Car Donations
A new tax law that was implemented in 2005 simplified the tax implications of donating your car. Prior to this, the IRS allowed people to make a tax deduction based on the car’s market value, regardless of how much or how little the vehicle was sold for.
This has changed and car owners have more flexibility in terms of tax deductions when they donate their car. Below are the four categories that came to be in January 2005.
Donated vehicles that sell for less than $500 qualify for a tax deduction at the fair market value of the car up to $500. This does not require much paperwork.
The 1098-c form is filed only for motor vehicles, while the 8283 form is mostly used for general property. Regardless, both forms can be used for a car donation.
Find Out How Much the Charity Sold the Car for
Most charities will sell car donations at public auctions. If the charity sells the car for $3,000, you will use this amount to make tax deductions. Unfortunately, most charities will sell a vehicle for much less than its fair market value.
In the event that the charity keeps the car or sells it to someone in need at a greatly discounted price, you will be able to claim the fair market value of the car.
How to Claim a Deduction
Once you have found out how much your car was sold for, you can proceed to claim a deduction from the IRS.
The first thing you need to do is report the amount on Schedule A. Remember that the total amount of all your eligible expenses should exceed the standard deduction amount for your returns. Your tax accountant should be able to advise you on how to make the biggest tax savings in this regard.
If your car donation deduction exceeds$500, you should complete form 8283. For deductions between $501- $5,000, you need to complete section A. For deductions greater than $5,000, complete section B and submit it with an appraisal.