Are you curious about the benefits of donating your used car, as opposed to selling it or trading it in? For Vehicles for Change donors, one of the biggest benefits of donating a car is the tax deduction.
A few years ago, anyone who donated a vehicle to a charity (such as a 501 (c)(3) organization like Vehicles for Change), could deduct the fair market value of the car from their taxes.
But on January 1, 2005, a new tax law took effect: now, when a taxpayer donates a car (whose estimated value is equal to or greater than $500) to a nonprofit, the amount the donor can deduct from their taxes depends on how the charity uses the vehicle. Check out this chart on how VFC uses car donations, and what it could mean for your taxes.
For example, if the nonprofit sells the donated vehicle, the donor will only be able to deduct the “gross proceeds from the sale” – up to the fair market value. If the charity makes major repairs to the vehicle before selling it, then the donor could deduct the selling price of the car, minus the cost of repairs.
According to the 2005 tax law, individuals can still deduct the fair market value of their donated cars if:
“The qualified organization will give the vehicle, or sell it for a price well below fair market value to a needy individual to further the organization’s charitable purpose” (IRS publication 526, page 8).
Vehicles for Change is the only nonprofit in the Maryland and D.C. area that meets this qualification by selling donated cars well below fair market value to low-income families. Because of this, we are one of the few nonprofits that can offer the possibility of deducting the fair market value of your donation from your taxes.
What is the fair market value? The IRS defines fair market value as: “The price a willing buyer would pay and a willing seller would accept for the car, when neither party is compelled to buy or sell, and both parties have reasonable knowledge of the relevant facts.” The fair market value – which is different than the retail price of the car – is the highest amount that can be claimed from a vehicle donation.
To get an idea of what your car may be worth, check out Kelley Blue Book. Their “Blue Book Value” tool will help you gauge what your car may be worth. Be careful in using this tool – the fair market value takes into consideration what your vehicle is worth in your specific geographical area, which may not be reflected on KBB. It’s also important to note that if your car needs extensive repairs, the “Blue Book Value” may not accurately represent how much your car is worth.
Additional Resource: To help explain the new guidelines, the IRS released this guide for car donors.