Donating your car before the end of the year can give you a tax break while helping a charity in need. Financial Consultant John Caserta breaks down the process for getting a tax deduction and becoming familiar with the charity you have chosen can help you avoid potential tax pitfalls and overall disappointment.
What happens to your car when you donate it to a charity?
* In most cases, the charity is selling the car and the proceeds are benefiting a group or organization. In some cases, the person donating the car can then take a tax deduction for the proceeds of the sale.
Will you qualify for a tax deduction and, if so, how much?
* Charitable contributions are only deductible if you itemized your deductions on Schedule A.
* Consult your tax professional.
o IRS Publication 4303 (A Donor’s Guide to Vehicle Donations) provides you with information about how much of a deduction you can obtain.
* You might be able to deduct either the gross proceeds of the transaction or the fair market value of the car.
o There are certain criteria the need to be met for each scenario.
* Tax deductions are not tax credits.
o Where a tax credit reduces your tax liability dollar for dollar, a deduction reduces your taxable income, to which your income tax rate is applied, thereby reducing the taxes you owe.
What to consider when making a vehicle donation?
* Who benefits from the donation?
o It can be difficult to determine exactly how your vehicle donation can help a charity or those in need from an advertisement on TV or the radio.
o Check out the charity’s website or consult resources like CharityWatch, which can provide detailed information on the charity and its operations.
* How much of sale proceeds will actually be donated?
o A common consumer complaint is how little money from the transaction is actually used for charitable causes. Different charities have different operating costs. This factor, along with others, will determine how much is actually donated.
* Will you actually get a tax benefit?
o IRS Publication 4303 outlines the criteria your donation needs to meet to get a deduction for the donation.
* Check out the charity.
o Only 501(c)(3) organizations, such as charitable, educational, or religious organizations, are considered “qualified charities”.
o Use the IRS’s “Exempt Organization Select Check” tool to determine if your organization is qualified. Keep in mind, this tool does not list all exempt organizations.
* Document the transaction.
o Keep records of the transaction, including receipts and photographs of the vehicle in the even that you’re audited.