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Should You Donate Your Car to Charity? by Bill Siuru

Should You Donate Your Car to Charity?

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.