It pays to be kind and generous, especially when it comes to taxes. The Internal Revenue Service (IRS) allows you to donate an auto and then claim a tax deduction later. In other words, it helps you save some tax money while you’re able to help others.
The process of claiming a tax deduction has been simpler over the years, but it doesn’t mean it’s easier, especially for first-timers. Before you deduct your vehicle donation, remember the following:
You cannot donate your car to your next-door neighbor and then claim a deduction afterward. You have to give it to a 501(c)(3) organization. It refers to a trust, unincorporated association, corporation, private foundations, or any organization that doesn’t have to pay federal income tax.
These can also include churches and educational institutions. There are strict requirements these groups have to meet to qualify.
There are two types of deductions you can do to lower your federal tax: standard and itemized. The standard deduction is more straightforward — reduce the taxable income to the set deduction, that’s it.
Itemized deductions vary depending on the rules. For vehicle tax donation, you need to base it on the fair market value (FMV). This is the price that both the seller and the buyer can agree.
The easiest way to know the FMV is to use car sales guides such as Kelley Blue Book. The IRS, however, has also set guidelines on when to use the vehicle’s FMV when claiming your deductions.
Furthermore, the tax reform law called Tax Cuts and Jobs Act has increased the standard deductions. This can have an impact on your decision to itemize. To claim, your total itemized deductions should be higher than the standard deductions.
The last thing you want to happen is to get in trouble with the IRS because of your vehicle donation. When in doubt, you can always approach companies that can immediately connect you to charitable causes. They can also help you with the processing your tax deduction.