So what’s to be done with the old family Clunker? It’s now ten years old and it has been around the world twice. From July through October of 2009 you could have turned that old heap into a $3,500 – $4,500 voucher towards the purchase of a new car. (Of course it had to be in drivable condition and been continuously insured.) Now it seems that no one wants to buy it.
Through the process of elimination, many people arrive at the opportunity of last resort – “We will donate it to charity and get a tax deduction!” In fact you may claim a tax deduction for the donation if you itemize your deductions on your income tax return. Now be careful… it seems the old clunker suddenly becomes quite valuable when the “How much can we deduct?” question comes up. IRS has established guidelines to assist you in determining the “right amount to deduct” when donating this once-again valuable family heirloom.
First, make the donation to a qualified organization. Generally, the most common types of qualified organizations are Section 501(c)(3) organizations such as charitable, educational, or religious organizations. To determine if an organization is qualified, you can check Internal Revenue Service (IRS) Publication 78, Cumulative List of Organizations. This publication is available on the IRS website. (www.irs.gov) You can also call the IRS Customer Account Services division for Tax Exempt and Government Entities toll-free at (877) 829-5500 to find out if an organization is qualified.
Churches, synagogues, temples, and mosques are treated as tax exempt organizations, but they will not be listed in Publication 78.
When you donate your car to charity, you must first determine its fair market value. The FMV represents the maximum deduction you may take on your federal income tax return.
For a FMV of less than $250, you’ll need a receipt (a letter from the organization will suffice) that shows the name of the organization to which you made the donation, the date and location of your contribution, and a reasonably detailed description of the car. You’ll also need a record of the FMV of the car (and how you determined it) at the time of the contribution.
If you claim a deduction (FMV) of $250 or more, you’ll need a contemporaneous written acknowledgement of your donation. In addition to information about the organization, the date and location of your contribution, and a description of the car, this acknowledgement must include one of the following:
- A statement that no goods or services were provided by the charity in return for the contribution, if that was the case
- A description and good-faith estimate of the value of any goods and services that the charity provided in return for the contribution, or
- A statement that goods or services that the charity provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case
If you claim a deduction of more than $500, the charity must use IRS Form 1098-C as the acknowledgement. This form will indicate that the charity either:
- Sold the car in an arm’s-length transaction to an unrelated party (the date of the sale and the sale’s gross proceeds will be listed)
- Will make a significant intervening use of or material improvement to the car before transferring it, or
- Will give the car, or sell it for a price well below its FMV, to a needy individual in furtherance of its charitable purpose
If the charity elects either of the last two options listed above, it must send you Form 1098-C within 30 days of your donation; otherwise, you must be sent Form 1098-C within 30 days of the sale of your car. You must attach a copy to your return.
If the charity sells your car and you claim a deduction of more than $500, you can deduct the lesser of (1) the gross proceeds of the sale (as indicated on Form 1098-C), or (2) the car’s FMV on the date of your contribution. However, if the charity doesn’t sell the car, but instead elects to (1) make a significant intervening use of it or materially improve it prior to its transfer, or (2) give away the car or sell it at a price well below its FMV to a needy individual in furtherance of its charitable purpose, you can generally deduct the car’s FMV at the time of your contribution. In this instance, Form 1098-C should indicate which of the two exceptions applies.