The basic tax procedure is that IRS allows for certain standard deductions from the gross income (i.e., income earned by a person in the financial year) of an individual and then based on the income range, applies a certain percentage of tax on the taxable income (i.e., gross income less the standard deductions).
Apart from this, IRS also allows for certain itemized deductions and car donation tax deduction is one among them. The “car donation” is termed as a “non cash charitable contribution” and IRS provides for tax benefits on such non cash expense. You would qualify for a car donation tax deduction if your total deductions are greater than the standard deductions received for you, your spouse and children (if applicable).
Since the government lost millions in taxes because of large inconsistencies between the claimed value of the donated car and its actual worth, the government put its foot down strongly and limited deduction amounts for donated vehicles as well as defined penalties for fraudulent acknowledgments provided to taxpayers.
Now, the exact car donation tax deduction would be based on how the charity uses the vehicle. If the organization plans to sell the vehicle, the benefit derived from the car donation tax deduction would be equivalent to the gross proceeds the organization obtained from the sale. However, if the organization plans to use the vehicle for “significant” tax approved charitable work as deemed by law, the donor can claim the fair market value of the vehicle for the car donation tax deduction.
If the organization sells the vehicle, one of the following will apply:
- If the vehicle sells for $500 or less, then as the donor, you may deduct what you consider as the fair market value of the vehicle or the actual amount for which the vehicle was sold, whichever is less.
- If the vehicle sells for more than $500, then the actual selling price of the vehicle is what you can deduct as car donation tax deduction.
The shortcoming of the new rule is that the donor is unsure of the amount that they would obtain as car donation tax deduction at the time of making the donation. However, advantages are that this rule eliminates the tedious process of having to determine the fair market value of the vehicle to be donated and also the risk of the donor getting into trouble by overstating the value of their car donation tax deduction while itemizing to file income tax returns.
