Are you planning to donate your car to charity? You must proceed with this decision, which can lead to significant tax savings. However, it is best to learn how the tax deduction process works and the tax benefits it offers.
Tax Deduction Process While Donating Car to Charity
Donating the car to charity can lead to huge tax savings if you plan a charitable contribution deduction. The IRS or Internal Revenue Service needs you to estimate the tax deduction in the following ways, depending on the way the charity uses the donation:
· Deductions for vehicles the charity sells are as per the sales price
· In other cases, you may use the fair market value of the car
The below four steps will help you understand and claim the tax deduction for your donated vehicles.
1. Find Out the Amount for Which the Charity Sold the Car
The amount of deduction is the price the charity sells your car for. For example, if the charity sells the car for $3,000, the deduction limit is $3,000, even if $4,500 is the fair market value.
But if the car is sold at a huge discount to a needy person, or the charity keeps the car for self-use, the deduction amount is the fair market value.
If the charity sells the car for $500 or less, you may deduct $500 or the car’s fair market value, whichever amount is less. Suppose the car is estimated at $650 but sells for $350, you may deduct $500.
2. Determine the Fair Market Value of the Car
Next is to estimate the fair market value of your car to estimate the deduction. The IRS recommends using a reputed used-car price guide for the same. You may also consider using an online tool to search the private party rates for your car based on its model, make, and condition.
3. Claim the Deduction
You need to claim the deduction for your donated vehicle. For this, you must have relevant documents of the donation. The basic documents you require from the charity are:
· Your name
· The date of donation
· Your vehicle identification number
· A statement confirming any services or goods you received in exchange for a donation
Mention the amount of deduction on Schedule A. As you can claim a deduction from car donation only if you itemize, the total eligible deductions on Schedule A usually must exceed the filing status’s standard deduction amount.
4. Additional Forms You Require
If your vehicle donation exceeds $500, you must complete Form 8283. You must complete Section A if the deduction is between $501 and $5000. If the deduction exceeds $5000, you must complete Section B. In Section B, you must also provide a written appraisal form as documentation.
How Can You Maximize Tax Gains with Car Donations to Charity?
If you wish to claim the car donation to reduce the federal income taxes, you must itemize the deductions above your standard deduction. To maximize your tax gains with a car donation to charity, you must practice the following ways:
The Charity Must Qualify for Car Donation Tax Gain
The charity to which you donate your car must be registered as a 501©(3) non-profit organization with the IRS. If it is not registered, the donation will not be tax deductible. Hence, donating a car to a charity that qualifies with the IRS is best.
Itemize the Deductions
You must itemize the deductions when planning for a car donation deduction on the tax return. You must meet specific guidelines about the amount which can be claimed. You may donate your vehicle without itemizing, but claiming a deduction for the car and taking the standard deduction is impossible.
You must choose between taking the standard deduction for single tax filers or itemizing. You must itemize if the deduction, including the $3000 deduction for the car, is more than the standard deduction. But you must be better off with standard deductions if there are no other deductions. Consult a professional to know what’s best for you.
Research the Way a Charity Uses Cars
It is essential to know the way the charity uses cars. If the charity:
· Uses the car
The car’s fair market value is deducted, which is the amount the car would sell in the open market. The pricing guides from Edmunds can help you estimate the correct figure.
· Sells the car for more than $500
If the deduction is limited to the proceeds amount from the sale, if the car is worth $3000, but the charity gains only $2500, it is the deduction.
· Sells the car for less than $500
You deduct $500 or the car’s market value if it is less than $500. If your car is around $450 but sells for $350, you may deduct $450. If the value of your car is $800 but sells for $400, you may deduct $500.
Maintain Good Records
You must retain the documents from the charity, which include specific details about the donation, the subsequent sale amount, and the car’s value. Without this detail, you cannot deduct more than $500. There are a few applicable restrictions. Make sure you consult the IRS guide for vehicle donation.
Claiming the vehicle donation tax deduction may need additional paperwork. Still, the abovementioned tips will help you enhance its value while contributing to the community and more space in the driveway.