The basic tax process is that IRS permits certain standard deductions from the consolidated income of an individual and according to the income range, applies some percentage of tax on the taxable income.
In addition, IRS enables certain itemized deductions and tax deduction on car donation is one such deduction. The car donation is considered to be a “non cash charitable contribution” and tax benefits on such non cash expense are offered by IRS.
Tax Implication of Car Donation
To have a better idea what are the right process and tax implication of your car donation, following are a few of the points that you should keep in mind while claiming a deduction on your next tax return, which can also be considered as the tax implications applied by the IRS on car donation:
Qualified Organizations – As per the IRS, only qualified organizations are eligible to receive car donations for tax deduction option. The IRS determines the recognized charitable, religious and educational institutions in the IRS Publication 78, which is explained in the section of Cumulative List of Organizations.
Itemized Deductions – A car donation can be claimed only as a tax deduction if you have selected to itemize your expenditure and not if you use the standard deduction in filing your tax returns. You can get a better ideal on IRS Topic 501 (Should I Itemize?) that explains the requisites of both the standard and itemized deductions.
Directly Donate your Car – It is advisable to donate your car directly to the charity of your preference. A middleman may cut down the amount of deduction received by the charity if you use any type of mediation. The idea is for the charity to get optimum benefit from the car donation, instead of the middleman.
Ask for an Acknowledgement – Generally, the charity sells the donated car and utilize the money to fund its assignments and projects. Funds, which come from the vehicle donation, will be the money you can utilize for your tax deduction. If the amount is more than $500, you must comply with Section A of IRS Form 8283 and annex it to your tax return. The IRS has established set 30-day limit from the date of sale for the charity to provide you the acknowledgement manifesting how much it derived from the sale.
Separate Appraisal – If your car’s estimated value is more than $5,000, you should get valuation done through an independent appraisal. This is quite prominent if the beneficiary hasn’t sold the car, and is using it for its own purpose. Under these circumstances, the tax deductible value will be the appraised value of the car. For cars that have value less than $5,000 and if it is kept by your charity without selling to anyone, any independent appraisal is not required. An IRS-accepted policy like the Kelley Blue Book can be referred to determine the vehicle’s value.
In any case if your valuation is questioned by the IRS, you will have to provide with current receipts for important repairs or tire purchase to substantial the amount which have been claimed. The IRS may ask for penalties for misrepresenting the actual car donation valuation. This will be entirely your own problem and it cannot be solved by the charity in any way.