As the name suggests, car donation refers to giving away your old and no longer to be used car to a charitable organization. Not only does it give benefit to the organization which receives the donation, but also the person who donates his car is benefitted in the form of tax saving or tax deduction. In fact, car donation tax deduction has been used by a number of taxpayers in the US, for the purpose of availing reduction in the taxes payable by them. Not only this, car donation is a great way to dispose off your old car. In order to claim the savings in tax, its donation to the charity has to be included in the charitable contribution deduction. The amount of tax deduction received due to car donation can be maximized if things are planned in a proper manner. Depending upon the way the donation is used by the charitable organization, you have to calculate the tax deduction as required by the Internal Revenue Service (IRS). In case the car is sold by the charitable organization, the deduction is calculated based on its sales price. Otherwise, its fair market value is used as the criteria to calculate the deduction amount.
How Car Donation Tax Deduction Is Calculated?
1. Find The Sale Price Of The Car
When you donate car for tax credit, you should find the sale price of the car as this determines the amount of tax deduction that you will receive. If the charity to which you have donated the car sells it off, the price at which it is sold is taken as the amount of deduction. For instance, if the fair market price of the car is $ 5000, but the charity sells it for $ 3500, the amount of deduction is limited to $ 3500 and not $ 5000. On the other hand, if the car is kept by the charity for its personal use or sold to a needy person at a discounted price, the deduction can be claimed because of its fair value.
2. Calculation Of Fair Market Value Of The Car
In case of sale of the car, the calculation of deduction amount becomes simple, but things are different in other circumstances as the calculation deduction value is based on the norms of IRS (Internal Revenue Service). The IRS recommends the usage of a reputed used-car price guide for this purpose. You can also search the correct value of the car on the internet, with factors like model, make and condition used as key determinants for calculation of fair market value. It is the price that the buyer would be willing to pay and the seller would be willing to accept depending upon the parameters of the car as mentioned above. It is also good get your car properly evaluated before you donate it to charity.
3. Claiming The Donate Car Tax Deduction
In order to claim the donate car tax deduction, the amount has to be reported on the basis of Schedule A as it can be done only if all the eligible expenses on the schedule are in excess of the standard deduction amount.
4. Additional Forms And Paperwork
In case the amount of car donation tax deduction exceeds $ 500. Form 8283 has to be completed. For amounts falling between $ 501 and $ 5000, Section A must be completed and for deduction amount more than $ 5000, you have to complete Section B. In the latter case, the documentation has to be completed with the written appraisal.
All these formalities have to be completed properly for claiming the car donation tax deduction amount. Fulfilling these post donation requirements is in fact, the key to qualify the tax deduction amount. In order to claim your deduction, it is necessary to have proper documentation of the entire transaction. It should be obtained from the charity and have the name of the donor, along with the date of donation, the vehicle identification number of the car and the date of donation. In case you have received any good and services, a statement describing them should also be included in the documentation.
Benefits Of Car Donation To The Charitable Organizations
In case you are willing to donate your car to a charitable organization, you should be happy with the fact that you are going to give a great benefit to them. A large number of charities have special donation programs, under which they accept cars as donation. These include charitable, religious, or educational organizations, which may need the vehicles or money for different purposes. The donations made to any charitable, or educational organization may not be considered for tax deduction, though all religious organizations qualify for it. IRS lists various charitable organizations that qualify for tax deductions. To claim the tax deduction, the organization chosen for donating the car must be under the norms of the IRS. So, be sure to check this out.
Some of the donated cars may be used by these charities for transporting supplies and volunteers wherever they are needed. Others may sell off the donated cars directly or through auction companies. On the other hand, there are some specialized processing companies, which are engaged in the business of selling donated cars and distributing the proceeds to the charitable organization suggested by the donor. In return, these processing companies charge a percentage amount of the sale price of the car as a commission. The purpose behind employing such a company is to allow the charity to take benefit of the car donation program, without getting directly involved in the direct sale of the car. When availing the service of a processing company, it becomes necessary for the donor to find out the actual amount going to the charity and the amount charged as commission by the processing company, so that he can calculate and claim the right amount of tax deduction. The latter is considered as an administrative expense and has to be treated that way for making relevant calculations.
In conclusion, the person who wishes to donate his car for charity must make sure that he chooses the right organization for doing so, because the donation should not fall into the wrong hands. Checking the credentials of the charity is therefore, of utmost importance if you understand your responsibilities as a donor. The aim is not only to run after the tax benefit but also to ensure that the donation works in benefit of the organization, which receives it.