I was recently reminded of a former client who seemed truly excited when sending me her tax “stuff” a few years back. It seemed that she had donated her used car to charity and was thrilled when the charity told her that the Kelly Blue Book value of the auto was $3,000+ (this was before the rules for deducting the contribution of an auto changed – see below). I got the impression from her note that she anticipated getting a huge refund.
I was sorry to have to disappoint her. The client was retired with Social Security, a small taxable pension and a W-2 for part-time work as a school crossing guard. She rented (no real estate or mortgage interest deductions) and had only average medical expenses and cash contributions, so even with the car donation she did not have enough total deductions to be able to itemize. Each year she got most of the little over a hundred in federal income tax withholding back – and that year was no different.
The most important lesson to be learned from this situation is that a tax deduction is of no value if you cannot use it. While donating her car to charity was a noble thing which provided a value to the charity it put absolutely nothing in her pocket.
If her deductions were such that she could itemize and claim all or part of the value of the car, the deduction would only help to the extent of her taxable income. If a Schedule A had brought her taxable income to below “0”, which it would have in her case, the “in pocket” benefit from donating the car is a reduced one.
And even if she had been able to itemize, and her income was substantial enough to absorb the full deduction, the most she would gain is pennies on the dollar. A $3,000 deduction which is fully utilized would result in putting $300, $450, $600 or $840 in a taxpayer’s pocket – much less than if the car had been sold or traded in.
The moral of the story – if someone tells you, or you read somewhere, that doing something will result in a tax deduction check with your tax professional to be sure that you can actually use the deduction before taking any action.
And now a review of the rules for deducting the contribution of a car to charity:
In order to claim a deduction of more than $500 for donating a motor vehicle (car, motorcycle, boat, or airplane) to charity, you must attach Copy B of the IRS Form 1098-C, which has been provided by the charity, to the Form 8283 that is included in your 1040.
The Form 1098-C will include the name and Taxpayer Identification Number of the charity to whom the car has been donated, the vehicle identification number of the auto, and the date of contribution. Form 1098-C must be issued within 30 days of either the date of the contribution or the date of the disposition of the vehicle by the charity.
If you donate a car to charity that is worth more than $500 make sure to get Copy B of Form 1098-C from the charity before the end of the year. If you have not received it by the middle of December you should call the charity and ask for it. The charity can give you a statement in lieu of Form 1098-C as long as it contains all the necessary information discussed below.
It is possible that you donate a car to charity late in the year and the car is not sold by the charity at auction until the next calendar year. Just note that if you want to claim a deduction of more than $500.00 for the car you must have a Form 1098-C to include with the mailing of your 2009 Form 1040.
Besides the items listed above, additional information will be included on the Form 1098-C depending on what the charity does with the donated car.
(1) If the charity sells the car without significant interim use or material improvement, the Form 1098-C will include the date the vehicle was sold by the charity, certification that the sale was an "arm's length" transaction among unrelated parties, and the gross proceeds from the sale. Your tax deduction is limited to the gross proceeds from the sale.
(2) If the charity intends to temporarily or permanently use the car in its operations, or intends to make "material" improvements to the vehicle before selling it, the Form 1098-C will include a certification and description of either the significant interim use and intended duration of such use or the intended material improvement and a certification that the vehicle will not be sold before such use or improvement is completed.
(3) If the charity intends to sell the car to a "needy" individual at a price that is significantly below "fair market value", or give the car to such an individual, the Form 1098-C will include a certification that the charity will make such a sale or transfer of the vehicle, and that the sale or transfer will be in direct furtherance of the organization's charitable purpose of relieving the poor and distressed or the underprivileged who are in need of a means of transportation.
In situations (2) and (3) you can deduct the "fair market value" of the vehicle. You can use the "private party value" for the vehicle, adjusted for mileage and condition, as listed in the Kelly Blue Book or a similar established used vehicle pricing guide. If the fair market value is more than $5,000 you must obtain a formal appraisal, a copy of which must also be attached to your Form 8283. In these situations the charity will not provide a value - the taxpayer making the contribution must provide and substantiate the fair market value of the car donated.
To recap - in situation (1) the donee charity will tell you what you can deduct. In situations (2) and (3) the donor taxpayer must determine the amount of the deduction, subject to audit by the IRS.
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I was sorry to have to disappoint her. The client was retired with Social Security, a small taxable pension and a W-2 for part-time work as a school crossing guard. She rented (no real estate or mortgage interest deductions) and had only average medical expenses and cash contributions, so even with the car donation she did not have enough total deductions to be able to itemize. Each year she got most of the little over a hundred in federal income tax withholding back – and that year was no different.
The most important lesson to be learned from this situation is that a tax deduction is of no value if you cannot use it. While donating her car to charity was a noble thing which provided a value to the charity it put absolutely nothing in her pocket.
If her deductions were such that she could itemize and claim all or part of the value of the car, the deduction would only help to the extent of her taxable income. If a Schedule A had brought her taxable income to below “0”, which it would have in her case, the “in pocket” benefit from donating the car is a reduced one.
And even if she had been able to itemize, and her income was substantial enough to absorb the full deduction, the most she would gain is pennies on the dollar. A $3,000 deduction which is fully utilized would result in putting $300, $450, $600 or $840 in a taxpayer’s pocket – much less than if the car had been sold or traded in.
The moral of the story – if someone tells you, or you read somewhere, that doing something will result in a tax deduction check with your tax professional to be sure that you can actually use the deduction before taking any action.
And now a review of the rules for deducting the contribution of a car to charity:
In order to claim a deduction of more than $500 for donating a motor vehicle (car, motorcycle, boat, or airplane) to charity, you must attach Copy B of the IRS Form 1098-C, which has been provided by the charity, to the Form 8283 that is included in your 1040.
The Form 1098-C will include the name and Taxpayer Identification Number of the charity to whom the car has been donated, the vehicle identification number of the auto, and the date of contribution. Form 1098-C must be issued within 30 days of either the date of the contribution or the date of the disposition of the vehicle by the charity.
If you donate a car to charity that is worth more than $500 make sure to get Copy B of Form 1098-C from the charity before the end of the year. If you have not received it by the middle of December you should call the charity and ask for it. The charity can give you a statement in lieu of Form 1098-C as long as it contains all the necessary information discussed below.
It is possible that you donate a car to charity late in the year and the car is not sold by the charity at auction until the next calendar year. Just note that if you want to claim a deduction of more than $500.00 for the car you must have a Form 1098-C to include with the mailing of your 2009 Form 1040.
Besides the items listed above, additional information will be included on the Form 1098-C depending on what the charity does with the donated car.
(1) If the charity sells the car without significant interim use or material improvement, the Form 1098-C will include the date the vehicle was sold by the charity, certification that the sale was an "arm's length" transaction among unrelated parties, and the gross proceeds from the sale. Your tax deduction is limited to the gross proceeds from the sale.
(2) If the charity intends to temporarily or permanently use the car in its operations, or intends to make "material" improvements to the vehicle before selling it, the Form 1098-C will include a certification and description of either the significant interim use and intended duration of such use or the intended material improvement and a certification that the vehicle will not be sold before such use or improvement is completed.
(3) If the charity intends to sell the car to a "needy" individual at a price that is significantly below "fair market value", or give the car to such an individual, the Form 1098-C will include a certification that the charity will make such a sale or transfer of the vehicle, and that the sale or transfer will be in direct furtherance of the organization's charitable purpose of relieving the poor and distressed or the underprivileged who are in need of a means of transportation.
In situations (2) and (3) you can deduct the "fair market value" of the vehicle. You can use the "private party value" for the vehicle, adjusted for mileage and condition, as listed in the Kelly Blue Book or a similar established used vehicle pricing guide. If the fair market value is more than $5,000 you must obtain a formal appraisal, a copy of which must also be attached to your Form 8283. In these situations the charity will not provide a value - the taxpayer making the contribution must provide and substantiate the fair market value of the car donated.
To recap - in situation (1) the donee charity will tell you what you can deduct. In situations (2) and (3) the donor taxpayer must determine the amount of the deduction, subject to audit by the IRS.
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Any questions?.
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TTFN
3 comments:
Hello and thank you for your post, it was really interesting for me. I absolutely agree that it is always better to check everything with the professionals to avoid consequent problems or complications.
All the best,
Elli
You do have to itemize on your federal tax return in order to claim a deduction for a car donation. You are correct, it is always best to ask many questions before you donate a car to charity.
I'm from the UK, any everytime I read an American article about tax deductions and especially car donation tax deduction I feel overwhelmed.. How do you manage to understand all those little regulations and rules?
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