SANTA MONICA, Calif., Dec. 10, 2013 /PRNewswire/ -- Donating a car to charity can be a significant and selfless act, especially during the holiday season. But if you're looking to maximize the tax deduction for your charitable effort, there are a few specific points that you should consider, says Edmunds.com, the premier resource for car shopping and automotive information.
"Until 2005, donors could simply deduct the 'fair market value' of the vehicle, but today's rules are much more stringent, and it's nearly impossible to deduct the full market value," says Edmunds.com Consumer Advice Editor Carroll Lachnit. "Understanding the proper procedures can help donors get the most out of their deductions and -- more importantly – avoid penalties if audited."
Of course, some car donors won't bother with the tax implications, and for them, the process is as simple as calling up a charity and arranging delivery. But to help other donors navigate the sea of tax regulations – or to help them determine if it makes financial sense – Edmunds.com shares five helpful tips:
Know How Much to Claim – Many people think they can deduct the "fair market value" of their car when they donate it to a qualified charity. However, under current rules you can only deduct the amount that the charity confirms in writing. Unless your car is in good or excellent condition and used by the charity in its business (and by one estimate, non-profit organizations choose to keep no more than five percent of donated vehicles), the charity will most likely sell it at auction or to an auto salvage yard. In that case, your deduction is based on the car's selling price, which in some cases may be close to zero.
Choose a Qualifying Charity – A qualified charity is one that has been approved by the IRS as an "exempt-status" or 501(c)(3) organization. Many religious organizations also qualify, even though they aren't required to file for 501(c)(3) status. A comprehensive list can be found on the IRS's exempt organizations site.
Itemize Your Tax Return – If you want to claim your vehicle as a tax deduction, you must itemize your return, even if the car is the only deduction. But if the sum of your itemized deductions (including the car) does not exceed your standard deduction, then you might not want to claim itemized deductions after all.
Save Your Paperwork – The tax benefits for a donated car require a lot of documentation, whether the car is junked, sold at auction or given to a charity's client. Keep all these papers or electronic files because you'll need them at tax time. IRS Publication 4303 has all the details.
Consider an Alternate Approach – Instead of donating the car outright, consider selling the vehicle yourself and donating part or all of the proceeds. While this process certainly takes more effort on your part, it generally leads to the highest return on your car's value, which benefits both you and your charity of choice.
While these tips can serve as a helpful guide, Edmunds.com strongly encourages anyone who deducts a charitable gift (including a car) to consult with a tax professional before they file their returns.
About Edmunds.com, Inc. Edmunds.com is a car-shopping Web site committed to helping people find the car that meets their every need. Almost 18 million visitors use our research, shopping and buying tools every month to make an easy and informed decision on their next new or used car. Whether you're at the dealership or on the go, we're always by your side with our acclaimed Edmunds.com iPhone and iPad apps and our Edmunds.com Android App. Our comprehensive car reviews, shopping tips, photos, videos and feature stories offer a friendly and authentic approach to the automotive world. We're based in Santa Monica, Calif., but you can connect with us from anywhere by following @Edmunds on Twitter or by becoming a fan of Edmunds.com on Facebook.