The old clunker has been sitting in the driveway for months. You know you need to get rid of it, but it’s not worth the trouble to sell it. You know there are charities that accept car donations, and it seems like the best way to get rid of Old Bessie — not only will you get rid of the hunk of junk that’s taking up space, but you’ll get a nice tax deduction as well.
Before you make the call, it’s important to understand how the vehicle donation process works and the paper trail you’ll need to properly claim the donation on your taxes. Without the proper documentation, what’s meant to be an act of kindness could lead to major headaches.
How the Donation Process Works
In the past, donors who gave vehicles to charity simply needed to request a receipt, and they then could deduct their vehicle’s book value on their federal income tax return. But changes to the tax law in 2004 put new restrictions on how much taxpayers can deduct, and how they must go about doing so. In general, if a vehicle is worth between $250 and $500, you can deduct the full amount. For vehicles worth more than $500, the amount of the deduction you qualify for depends on whether the charity uses the car or sells it. Because in many cases, charities don’t actually use donate vehicles for day-to-day operations but instead sell them for cash, you’ll need documentation to take the correct tax deduction.
What You Need
When you decide to donate your car, start a file to secure all of the documents you’ll need at tax time. In the unlikely event you are audited, easily accessing this paperwork will save you time and hassle. Your file should contain:
Vehicle Title. When you donate your car, sign the title over to the organization. Make a copy of the document showing the transfer. Never agree to hand over the car without filling out the transfer of ownership; if you don’t transfer the title, you are still legally responsible for the vehicle — and you could be liable for excise taxes or other fees.
State-Required Documents. While in most states you only need to provide the vehicle title to the charity to make the donation, in some states additional paperwork is necessary. For example, Texas, California, Alaska, Arkansas, Hawaii, Idaho, Kentucky, Louisiana, Oregon, South Carolina and Utah all require you notify the DMV of the transfer of ownership in addition to signing over the title. Check with your state’s DMV to confirm any additional requirements.
Acknowledgement of the Donation. After signing over the vehicle, the charity must provide an acknowledgement of the donation. Some charities use IRS Form 1098-C for this purpose. The IRS requires the acknowledgement include your name and taxpayer identification number (Social Security number), the vehicle identification number, the date of the transfer and a statement that either confirms no goods or services were provided in exchange for the donation, or describes and lists the value of any goods or services provided for the donation.
If the charity plans to sell the vehicle or has sold the vehicle, then the acknowledgement must also detail the amount the vehicle sold for. If this information is not provided, your deduction cannot exceed $500.
Description of the Vehicle. Before you donate your vehicle, take photos of it and make copies of any receipts or statements showing any repairs or improvements that you made to it. If there is a dispute regarding the vehicle’s value, these documents can help support your case.
Written Appraisal. If your donation is worth more than $5,000, the IRS requires you have an independent appraisal of the vehicle’s value before making the donation. Keep a copy of that appraisal, if necessary.
IRS Form 8283. You won’t be required to file this form until you do your taxes, but if you donate a vehicle worth more than $500, you must fill out section A and include it with your return and the acknowledgement from the charity. If the donation is worth more than $5,000, you’ll need to complete section B.
Donating your unwanted vehicle can be a great way to help others in need while also reducing your tax burden — but only if you keep complete detailed records. The organization accepting your donation can help you and ensure that everyone benefits from your good deed.
About the Author: Robin Bailey is a financial services professional who helps her clients make the most of their money.