About Tax Deductions for Donating Cars to Charity

The promise of a tax receipt is the primary reason that people choose to donate their car. Many people decide to donate their car rather than sell it due to the reduced stress involved in donating. However there are limitations on the deductions one is able to make on charitable contributions. There are limits to possible deductions.

Initially the Internal Revenue Service allowed donors tax deductions of the fair market value of the donated car. This practice ended up costing the government money, as deductions instead were made in the amount of the suggested retail price. In 2005 the JOBS bill was signed into law limiting the amount allowed in tax deductions associated with charitable donation of a motor vehicle. Deductions for donations worth over $499 depend on the intended use of the vehicle by the charity. If the car is sold the taxpayer can deduct only the amount of gross proceeds from the sale. If the car is to be used for significant tax-approved charitable work, the donor can deduct the fair market value. Penalties were also established for false or fraudulent acknowledgments made to donors.

Generally the tax deduction is made in the year in which the donation was made, but the written acknowledgment of the donation must be received from the charitable organization prior to filing tax returns or extensions. The acknowledgment does not get filed with the taxes unless the deduction exceeds $500; it should be kept with the filer's records to substantiate the donation. The 2005 law requires the recipient to provide written acknowledgment of the contribution within 30 days of the donation.

To ensure that the car donation qualifies for a tax deduction, it is necessary to donate to a qualified charity. There are car donation scams. The charity must be eligible to accept non-cash donations; this is verifiable through the tax-exempt status. It is also important to note that organizations that sell the cars on behalf of the charity often take a percentage of the sale amount in payment. Also a tax deduction cannot exceed more than half of one's adjusted gross income. Since 2005 the IRS has scrutinized non-cash donations so it is important to obtain and attach the proper documentation for the donation to your income tax return.

The amount of deduction that is allowed on a specific automobile donation depends on the charity's intended use of the car. Some charities sell the car or parts for cash, others give the car to those in need to get themselves off the ground, and in some occasions the car is used directly by the charity to transport people to hospitals, deliver food and clothes or to teach people the auto mechanic trade. If the car is sold, the deduction is not to exceed the gross profits of the sale.