About Donated Car Tax Deductions

By Bill Herrfeldt

  • Overview

    It used to be easy to give your car to a charity and take its value as a deduction on your tax returns. But because of widespread abuse, the IRS tightened the rules in 2005. Where a person could deduct the fair market value of the car being donated before the change, now he can only deduct $500 on his returns unless he followed specific rules to deduct a higher value.
  • Unintended Consequences

    Since the passage of the new laws made taxpayers go through hoops to justify the deduction of their gifts to charity, people at the Salvation Army, a major national player, report that automobile donations have been reduced by about a third. Furthermore, the people who donated cars of high value no longer contribute them to charity. In fact, the average value of a donated car is now significantly below $500.
  • What Charities do With the Cars

    The majority of automobiles donated to charity are sold at auction and the net proceeds are paid to that charity. The IRS will not question the value of the automobile if the donor claims $500 as his deduction on his tax return. However, if the car sold for more than $500, the charity must attest to the gross price it sold for at auction, and inform the donor in writing. However, there are charities that operate their own automobile donation programs where they fix up the cars either to sell or give them to the needy. In those cases, the charity must certify both the value of the automobile if it is worth more than $500, and that the repairs were actually made.

  • Warning

    You must be sure that the charity to which you are giving your car is a recognized charity by the IRS or your deduction will be disallowed. Many charities use companies to pick up the car and auction it, then give the net proceeds to that charity. Be sure that the company your charity uses is also recognized as a charitable organization, because your deduction will also be disallowed if that company is a for-profit entity.
  • Paperwork

    When you file your tax returns and they reflect a deduction for the automobile you gave to charity, it is not necessary to include the paperwork with the returns. However, it is always a good idea to keep it in your files for three years in the event the IRS questions your deduction.
  • Charities Must Sharpen Focus

    For decades, charities relied on the healthy tax deduction that donors of automobiles could take on their returns. With the passage of the new laws, charities must, once again, begin convincing the public of the truly good works they are doing in the community. It is not so much the potential tax deduction that is of value to donors; rather, it is the actual charitable action of donating to a charity so that it can continue doing its good works.
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