If you're buying a vehicle and have an old used car to get rid of, your first thought may be to trade the old car in towards the new purchase. However, as an alternative, you could donate your car to a qualifying charity.
If you donate your car, you will get to feel good about giving back to the community and possibly earn a tax deduction. Vehicle donation works out especially well for those who have a car that is or is almost undrivable.
Deciding Whether or Not to Donate Your Car
If you want to donate your used car simply because you think it is the right thing to do and don't care about a tax credit, the process is easy. Just pick out a charity that you like and give them your vehicle.
You will only need to provide the title, have the automobile removed from your insurance policy and make sure that it is no longer registered in your name.
On the other hand, if you want to donate your car to get a tax deduction, the process becomes more complicated.
- The charity that receives the car must have an IRS 501(c) (3) designation, meaning that they are "exempt" from taxes.
- You must itemize the deduction on your tax return to receive the credit.
- You must obtain a receipt from the charitable organization.
- If the charity keeps and uses the car, you can typically claim the fair market value (FMV) of the vehicle as a deduction, typically the Kelley Blue Book (KBB) retail value.
- If the charity sells the car at auction, you can deduct the selling price of the car. And if the vehicle sells for less than $500, you can deduct the FMV of the car up to $500.
- A vehicle donation tax deduction is not dollar-for-dollar credit. It is based on your income bracket which determines the percentage that you pay in taxes.
If you are wondering whether you will get more money by trading your car in or donating it and claiming a tax deduction, you have to do the math.
- Consider the actual amount of the deduction. Because the tax deduction won't be dollar-for-dollar, you have to think about how much you will really save on your taxes. For example, you donate a car that is sold by a charity at auction for $1,500. If you are in the 28% tax bracket, your actual reduction in taxes will amount to $420.
- Remember that itemization has to make sense. If you don't already itemize your tax return, it probably won't make sense to do it just for a car donation deduction. Whenever you do your taxes, you should look at what your standard deduction would be. You may find that taking the standard deduction is still better than itemizing your deductions (resulting in a lower taxable income and saving you more money), even after taking the car donation deduction.
For most people, donating a car for the purpose of claiming a tax deduction works out for them if they have an older used car that is worth very little. For example, you have a beat-up car that is nearly falling apart. You know that you would be lucky to get $150 for it at a dealership. But you find a charity that is willing to give you credit for the FMV of the vehicle, which is $2,000. In this case, if you fall into the 28% tax bracket (and your itemized deductions add up to more than the standard deduction), your deduction would be $560 and it would make sense financially to donate the car.
Donating Your Car: Some Charities to Consider
Not every charity handles donated cars in the same way. Most organizations sell donated vehicles and use the proceeds to support their causes. A few places actually keep the cars to deliver meals to the homeless, give rides to the elderly, etc. Some charities ask for vehicle donations so that they can sell them at discounted prices to families in need of transportation.
If you decide to donate your car, you may want to consider one of the following well-known and highly qualified charities:
- One Car, One Difference:
This group raises money for a number of different charities. They will sell your car at auction and give you a receipt for the selling price.
- Charity Motors:
They will sell your vehicle to a low-income buyer for 50% less than the market value, but they will provide you with a receipt for the full FMV of your car.
- Car Donation Wizard:
This is another organization that donates money to several different charities. They will sell your car at auction. And if the car sells for less than $500, you will get FMV up to $500.
- Mother Waddles:
This is one of the only charities that will give you KBB book value for your car donation, and only if the car runs. They will sell your vehicle at a reduced price to a family in need. If you donate your car and it doesn't run, they will sell it and give you credit for the selling price or FMV up to $500.
- Purple Heart:
This organization exists to help wounded veterans. They will sell your donated car and give you a receipt for the selling price or the FMV up to $500.
There are certainly many other worthy charities that would be happy to take your vehicle if you decide to donate your car. Just make sure that you research the one that appeals to you in order to verify that they meet the IRS qualifications for tax exempt charities.
If, however, you decide to trade your car in towards your next vehicle purchase, make sure that you know the fair market value ahead of time. Also remember that the value in this car will count towards your down payment on the new vehicle.
When You Need a Car
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