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You
got the new car bug and now you have to dispose of your
old vehicle. The dealer offers a ridiculously low trade-in
and ads you ran in the newspaper have gone unanswered.
Then you hear hear
an ad asking you to donate your old car to a charity
and take a tax deduction. While this seems
like an altruistic way to get rid of an unwanted vehicle,
it requires some homework to ensure it
is financially beneficial, will not trigger an IRS audit,
and the charity is legitimate.
Determining
if it is financially attractive depends largely on your
tax bracket. If you are up in the 28-percent or above
bracket and are donating a relatively valuable vehicle,
you could receive a substantial deduction. If it is
a couple thousand dollar beater and you are in the 15-percent
bracket, you are probably better off selling it, even
at a loss. This is especially true if you use the standard
deduction rather than itemizing. Complete a sample tax
return with and without the estimated donation value,
or better yet consult a certified tax adviser.
Because
of the popularity of auto donation programs, the IRS
is paying close attention to the fair market value placed
on donated vehicles. According to IRS Publication 561,
Determining the Value
of Donated Property,
"Fair market value is the price at which property
would change hands between
a willing buyer and a willing seller, neither having
to buy or sell, and both having reasonable
knowledge of all the relevant facts."
The
IRS cautions that the fair market value of a car may
be substantially different from its "Blue Book"
value. Overstating the price of your car is the primary
reason the IRS may not allow your deduction. You could
be held liable for not only the income tax, but also
interest and penalties.
Avoid
the IRS red flag by researching the current fair market
value of your vehicle. Consider the overall condition
of the car and its mileage. Document the condition by
taking pictures and keeping written notes of mechanical
work performed before donating it. The IRS may require
documentation if it questions the valuation.
Filing
the proper paperwork according IRS guidelines is also
essential when donating. If the vehicle is worth more
than $500, attach a completed IRS Form 8283 to your
tax return, or if your vehicle is worth $5,000 or more,
attach a qualified appraisal to your tax return. The
appraiser and the
charity must sign the Form 8283.
If
you are donating a newer vehicle and have access to
the Internet, you can easily establish its true value
via the Kelley
Blue Book website or by using Edmunds'
True Market Value®
used vehicle appraiser.
Both of these account for model,
accessories, mileage, condition, and location in determining
the true value, as directed by the
IRS. These cover only later model vehicles — KBB back
to 1981 and Edmunds back to 1990.
For
older vehicles, the Standard Guide to Cars and Prices,
published by Krause Publication is a widely accepted
source of prices for vehicles back to 1901. Keep a copy
of how you determined the value in the event of an audit.
Verify
that the particular charity is eligible to receive deductible
donations. The organization
should be able to provide an IRS Determination Letter
stating qualification as a tax-exempt
charity. This does not apply for religious charities
that need not apply for exempt status.
If
the IRS determines the charity is not legitimate, the
deduction will not allowed and could even bring
penalties. The IRS is closely scrutinizing donation
programs because some encourage tax fraud
by claiming that you can receive large deductions for
almost worthless vehicles.
Some
organizations use the cars themselves, while others
sell them directly to raise money or use an
outside seller, receiving either a flat rate or a percentage
of the profit. Some programs are not run
by charitable organizations, but for-profit salvage
companies which uses the charity's name in return
paying the charity a set amount for each vehicle donated.
Here you are not donating to a charity,
but giving the vehicle to a for-profit company and cannot
take a deduction.
To ensure you are dealing with a reputable charity,
ask what the charity plan to do with your vehicle. If
the charity plans to sell your car, will it use a broker?
Does the charity receive a large amount of the sales
price or simply a flat per-car fee unrelated to the
sales price? The more desirable charity is one that
receives a percentage rather than a flat per-car fee.
For instance, if the charity receives only 10 percent
of the sales price, you could donate more by selling
your vehicle and donating 100 percent of the proceeds.
You would still receive the same tax deduction and the
charity would benefit more.
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