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Want to donate your car to charity? Consider a new route.

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It’s extremely common these days to see and hear ads asking you to “Donate Your Car, Today.” This can be an appealing concept. Rather than go through the hassle of selling it yourself, you donate it to a charity that helps kids, and you get a big fat break on your taxes. That’s how it works, right?

Not so fast. It can pay to examine the reality of car donation. Here, we clear up a few mysteries about the tax deduction and provide an option that could put more money in both your and the charity’s pocket.

What exactly is the law?

The IRS (Internal Revenue Service) lets an individual qualify for a tax deduction when a car is donated to a registered 501(c)(3) charity. You give the car to the charity, and they provide you with a receipt that tells you the amount of the tax deduction you’ll be able to take (note: you may have to wait until they sell your donated car to receive that receipt). You can use this as an itemized deduction on Schedule A of your personal income tax return. That part is straightforward.

How much are you allowed to deduct?

Here, it gets a little confusing. You’re allowed to deduct the car’s Fair Market Value (FMV), with a few strings attached. FMV is defined as “the price a willing buyer would pay and a willing seller would accept when neither party is compelled to do either.” If your used car is worth $1700, (as determined by an authority such as the Kelley Blue Book) and the charity actually uses the vehicle themselves instead of selling it, in theory, you could deduct that value of $1700 from your taxes. In reality, this hardly ever happens.

What’s the average deduction?

Charities almost always auction off donated cars. Your maximum tax deduction is limited to the gross sales receipt, meaning the amount that the charity actually receives when they sell your car. Furthermore, the government has a rule affecting donated cars which sell for under $500, and in the vast majority of cases, the car will auction for less than that. The rule is that if the car is worth more than $500, but sells for less, you can deduct $500. So if your car is worth $700 and is auctioned off for $350, you can only deduct $500. If the car sells for more than $500, you can deduct the full amount. This would be a rarity. Expect to deduct about $500, and be happy if it’s more.

An alternative to consider.

Although it’s more work, there’s a way to donate that not only would benefit the charity more but would also bring in extra money for you. This is the “sell it yourself” option. The principle is easy. If the Blue Book value of your car is $1,500, try to sell it for that price. If you do, you can give the charity $500, because they very likely would have received only $300 for that same car at auction, and you could keep the rest. The charity would be up $200, you’d be up $1000 (and you wouldn’t have to report it as taxable income, as long as you weren’t selling the car for more than you paid for it).1 Next time you hear one of those jingles on the radio, think about a way for everyone to put a little more gas in their tank.

Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. 

1Melissa Crumish, “Income Tax Implications of Selling a Used Car,” DMV.org., July 12, 2012.