The majority of people who donate their cars to charity do so for a worthy reason. Aside from being an emotional act and gratifying a sense of social conscience, donating your car to charity might result in tax advantages. If you're new to this, keep reading to learn how it works, the steps to take when claiming a tax-deductible, and any other useful information.
Claiming Tax Benefits When Donating Your Vehicle To a Charity
Before we examine the tax benefits of donating a vehicle, we'll look at how giving your car to charity works.
No matter its condition, the charity has the following options when you donate your car:
- Keep it and use it for charitable events.
- Sell it off for less money to a needy person.
- Put it up for auction
- Sell to a scrap yard.
Giving to a charity is simple because many groups will arrange a pick-up at your home or office.
Even so, giving the car to a charity and taking the value out of your taxable income may not be the easiest way to claim your tax benefit from the IRS.
Before you write off the donation on your taxes, there are some important steps you need to take.
1. Know Whether the Charity Qualifies
The IRS outlines the guidelines you must follow before donating your car to charity;
First off, you must check out the organization. There are many charities out there that receive donations of all manner of kinds.
Still, it's important to know that not all charities are qualified for the tax deduction benefit.
According to the statutes, the charity organization must be a registered 501(c)(3). Alternatively, it can be a tax-exempt religious organization.
To verify its eligibility, you can visit the IRS website or call the hotline number provided.
After verifying their eligibility, evaluate if you'll get a tax advantage by donating to them.
2. Know Whether Your Vehicle Qualifies for The Tax Benefit
Some vehicles may not qualify for the tax benefit, thus, you should find out if yours is eligible.
Your car must be for use on the highways, streets, or roads. However, if it's for sale, it won't be eligible.
3. Have The Right Documentation
Charities typically make their intended use clear on the acknowledgement form they provide. The information contained in this document is essential in claiming the tax deductible.
The amount you can deduct from your donated vehicle will depend on what the charity does with the car.
Additionally, the deduction will only be allowed for the sale price before any associated costs are subtracted if they sell the car.
Depending on the charity, you can also get a 1098-c form which contains vehicles, aeroplanes, or boat contributions. Store this document in a safe place as you'll need it when filing your taxes.
The acknowledgement must include the following information if the charity sells your car for more than $500;
- Your full name
- Your IRS number
- The vehicles identification number (VIN)
- contribution date
- A statement indicating that the car was disposed of in an arm's length transaction
- Date of sale
- Gross sale proceeds
- A statement that the deduction won't exceed gross proceeds.
Like the acknowledgement form, the 1098-c forms your name, phone number, and name of the charity. It also contains your SSN and vehicle's VIN. You'll need to attach it to your federal tax claim.
Suppose the vehicle is sold for less than $500. In that case, the acknowledgement contains the name of the charitable organization, a short description of the car, and a statement that the charity didn't provide any goods or services in exchange for the donation.
If the car is worth over $5000 and the organization doesn't intend to sell it, get an appraisal report at least sixty days before donating it.
4. Determine Your Vehicle's Value
Determining your vehicle's value is a mandatory step in knowing the amount of tax benefit.
The market value of your car is the price an interested buyer is willing to pay for it. During a claim, it is vital to keep in mind that only gross proceeds from the sale are considered.
Therefore any costs associated with the vehicle, including repairs, high risk car insurance premiums, and towing charges, are not included in the car's fair market value.
Likewise, Just like a sale, when you donate your vehicle, check your DMV and ensure you comply with tax requirements.
You'll need to provide the following details to determine the fair value of your vehicle;
- Vehicles condition
- Year of manufacture
5. File Tax Forms
Your responsibility as a taxpayer is to file tax returns every year. Quite often, charitable organizations sell the vehicles given to them.
In this case, you can subtract the vehicle's fair market value as indicated in Form 1098C or the written acknowledgement.
You'll also need to file these documents with your federal income tax return.
- If the vehicle is sold for less than $500, you can keep the written acknowledgement for audit purposes.
- If the vehicle is sold for $501 to $5000, you'll need the written acknowledgement, Form 1098-C and Form 8283( Section A).
- If it's sold for more than $5,000, you'll need a written acknowledgement, Form 1098-C, Form 8283 (Section B), and a written appraisal to ascertain the car's value if the charity is not disposing of it off.
6. Itemize your Tax Deductions
Finally, itemize the deductions or costs allowed by the IRS that reduce your taxable income when claiming a tax deduction.
You can get a tax deduction if you donate your car to Cars2Charities during the next federal tax return. Remember to itemize your tax deductions and claim your deduction for the donation. Also, the charitable group must meet all the taxation rules to be eligible for the deduction. A simple check on the IRS website will reveal whether the organization is listed. Most importantly, know your vehicle's value and be aware of your responsibilities as a donor.