The 2018 tax laws promise to bring sweeping changes to American households. The nonprofit industry, in particular, will be feeling the effects of this law. Essentially, this law will allow individuals deductions of $12,000. Married couples will receive a deduction of $24,000. With these changes in effect, there are now fewer advantages to itemizing deductions. This development may change the reason behind why people decide to donate, which could spell trouble for charities.
The question that begs to be asked is — will the 2018 tax law have a negative effect on car donations? The succinct answer is perhaps, but only because of the amount of work involved to reap the tax benefits of a vehicle donation. But rest assured, car donations are still alive and well and will continue to thrive into the future.
Follow these rules to deduct a vehicle’s fair market value on your tax return
Itemize your return
Itemizing deductions should be your first order of business if you want to claim a car donation to reduce your federal income taxes. If your car is the only item donated, you could still itemize, but you could potentially run into problems. The chief problem being that taking a standard deduction would likely save you much more money in the long run (if your donated vehicle is your only deduction).
There’s only one way you’ll gain a tax benefit from your donating your vehicle — you have to have many deductions and their entire total, including your donated vehicle, must exceed the amount of the standard deduction.
Find a charity that qualifies
You can’t donate your car to just any old charity and expect to qualify for a tax deduction instantly. The charity must be considered a 501(c)(3) organization as defined by the IRS. The only exception to this rule are religious organizations as they do not need to file for 501(c)(3) status.
Understanding Fair Market Value
Fair market value, as defined by the IRS is “the price a willing buyer would pay and a willing seller would accept for the vehicle.” Both parties must also be aware of all relevant facts about the transaction. In this type of situation, neither party can represent a dealership. Both must be private parties.
To deduct a vehicle ‘s fair market value, the IRS requires that you meet four conditions:
- When the charity donates or sells the vehicle to a person in need at a price much lower rate than the fair market value.
- When the charity intends to make “significant intervening use of the vehicle.” In other words, the charity will press the vehicle into service.
- When a charity auctions your car for $500 or less, you can claim either the fair market value or $500 (the lesser amount).
- When the charity intends to make a “material improvement” to the vehicle (such as car restoration).
Figuring out the Fair Market Value of your vehicle
The easiest method by far of determining the fair market value of your car is to use Edmunds vehicle appraisal calculator. During your calculations you’ll need the following information: mileage, condition, year, make, model and trim level. Edmund’s appraisal calculator has been praised for being a fair and accurate tool for determining fair market value.
The reality of the situation is even if you determine the fair market value of your vehicle, there’s a good chance you’ll receive less than what it’s worth if you’re donating it to charity. Most cars donated to charity often aren’t in the best condition (that’s putting it lightly). Thus, they’re often junked. If not, they will be auctioned off.
If your vehicle is auctioned off, you must determine your deduction from what the vehicle was sold for as opposed to the fair market value. Statistically, only about 5% of donated vehicles are still in good working condition. Also, an organization has up to three years to sell your vehicle. That means you might not be able to make a deduction for some time to come.
Taking matters into your own hands
A clever way of maximizing your tax benefits is to sell the car yourself and donate the proceeds to a charity. The beauty of this approach is that you can set the price. That leaves you with more profit by the end of the transaction, which is likely more than what you would have received if a charity were to sell it.
Don’t forget about the paperwork
Paperwork can be a chore, but it’s a fact of life when it comes to claiming your tax benefits for a donated automobile. Know that a lot of documentation is involved no matter how you donate the vehicle.
If the charity you’re dealing with causes a delay concerning your paperwork, you can file Form 4868. This form is a request for a six-month extension to give you time to submit your return.
As a secondary step, you can simply file your return as you normally would without claiming the deduction of your donated automobile. When the paperwork clears and the charity sends you the information you need, you can use Form 1040X to file an amended return, thus claiming your deduction. Attach all relevant information from the charity along with your 1040X, and you will be good to go.
No one can truly say how long it will take before we see the effects of this new tax law. However, donating a vehicle should be more than just receiving a tax benefit. Donation and charity work should be driven by a sense of goodwill. Know that your donation could potentially help someone in need and the gratification from that act alone can be payment enough.
Featured Image credit: IFCAR via Wikimedia Commons