About Tax Deductions for Donating Cars to Charity
According to IRS Publication 4302, you can take a deduction on your income tax return for making a donation of an automobile to a charity. Because people were taking inflated deductions for such gifts in the past, this publication clarifies the rules for deductions and sets limits on the amounts.
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Legal Changes
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Until the laws governing donated vehicles to charity were amended in 2005 to tighten the rules regarding the value you can deduct for your contribution, people were declaring deductions that were far greater than their vehicles were worth. Also, greater involvement by the charities is now required by these laws. Unfortunately, since these new restrictions came into being, charities across the country have seen vehicle donations fall by about one-third.
Reason
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In no respects did the IRS attempt to inhibit this form of giving, because many qualified charities rely on automobile donations to continue their good work. The IRS simply attempted to clarify the circumstances under which a taxpayer could take a deduction by making the charity more accountable.
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Value Determination
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All taxpayers are limited to deducting $250 for each contribution to a charity. The charity must certify the value of your donation of a vehicle if it exceeds that amount. The government allows deductions of donated vehicles of up to $500 if the charity acknowledges that fact in a letter that includes the name of the charity, a statement that nothing was provided to induce the donation, an estimated value of inducements if there were any or a statement that the goods/services had so-called "intangible religious benefit." To deduct more than $500, the charity must inform the donor of the gross amount realized from the auctioning of the vehicle, state that the sale was at arm's length and provide the date of the sale.
Vehicle Use
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Rather than auction the vehicle, some charities will make the donated car available to someone in need. If that is the circumstance, the charity must inform the donor of its good-faith estimate of the value of the vehicle and the use the charity will put to the vehicle. If the charity plans to make improvements to the vehicle, it must acknowledge that, as well.
Warning
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IRS Publication 4302 contains a provision that can make your deduction for the charitable donation of a vehicle invalid. If the charity gives another company the responsibility to dispose of the vehicle and it receives only the net proceeds of vehicle's sale, no deduction is allowed if that company is a for-profit entity. The IRS takes the position that you are donating the vehicle to an entity that is not a charity. Check with your charity about its policies before you donate your vehicle.
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