Sick of that old clunker sitting in your driveway? Donate it to charity and get a tax deduction (if you itemize).
Unfortunately, donating cars to charity is not as easy as it used to be. In the old days (before 2005), you could donate a used car to a charity and deduct whatever you claimed it was worth. Hundreds of thousands of taxpayers donated vehicles and then grossly inflated the value to get larger tax deductions. In one case, a taxpayer claimed a $2,915 deduction for a 1980 Mercury station wagon that was ultimately sold for $30 by the charity it was donated to. The IRS figured it was losing hundreds of millions of dollars every year because of these kinds of abuses.
In 2005, the rules changed. Under the new IRS rules, if a person donates a used car to a charity and claims a deduction greater than $500, his or her charitable deduction is limited to the amount the charity receives when it sells the car (or a broker sells it on the charity's behalf). Thus, the owner of the Mercury station wagon mentioned above would get a $30 deduction today. The charity must document the sales price by providing the donor with IRS form, 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes. These rules apply not only to cars, but also to SUVs, trucks, motorcycles, boats, airplanes, and any motor vehicle manufactured primarily for use on public roads.
Exceptions to Vehicle Donation Rules
There are three significant exceptions to the general rule limiting your deduction to what the charity sells the vehicle for. If one of these exceptions applies, you may deduct the vehicle’s fair market value as shown in a used vehicle pricing guide, such as the Kelly Blue Book. (However, the value cannot exceed the private party sales price listed in the guide). Except where the car is an old clunker worth $500 or less, this will usually give you a much larger deduction than using the actual selling price for the vehicle.
If you're relying on any of these exceptions, the charity must give you a written acknowledgement within 30 days of receiving the vehicle which includes a statement about what it intends to do with the vehicle, such as improvements or actual use.
Exception 1—Deductions of $500 or less
If you claim a deduction of $500 or less for a donated vehicle, the vehicle’s valuation does not need to be based on the sales price. Instead, you may deduct the smaller of $500, or the vehicle's fair market value on the date of the donation.
Exception 2—Vehicle used or improved by charity
You may deduct a vehicle’s fair market value at the time of the donation (as opposed to its sales price) if the charity makes a “significant intervening use of or material improvement to” the vehicle before selling it. “Significant intervening use” means that the charity uses the car on a regular basis as part of its regular activities.
A “material improvement” is a major repair or improvement made by the charity (and not paid for by the donor) that significantly increases the vehicle’s value. Material improvements do not include cleaning, minor repairs, routine maintenance, painting, removal of dents or scratches, cleaning or repair of upholstery, and installation of theft deterrent device.
Exception 3—Vehicle given or sold to needy person
You can deduct a vehicle’s fair market value at the time of the donation if the charity intends to give it to a needy person, or sells it directly to a needy person for a price well below fair market value. The vehicle can’t be sold at an auction. For this exception to apply, one of the charity’s purposes must be to help the poor or underprivileged who need transportation.
Documentation Rules for Vehicles
There are special reporting requirements for vehicle donations. Make sure the charity gives you the proper documentation or the IRS may challenge your deduction.
Vehicles Sold For More Than $500
Whenever a donated vehicle is sold for more than $500, the charity must provide the donor and the IRS with a written acknowledgment within 30 days after the sale. The IRS has created a special form for this purpose, IRS Form 1098-C, Contributions of Motor Vehicles, Boats and Airplanes.
Donated Vehicles that Are Not Sold
You can deduct the fair market value of the vehicle at the time of the donation if, instead of selling the vehicle, the charity intends to:
- make significant use of the vehicle
- make material improvements to it before it is sold, or
- give or sell the vehicle to a needy person.
If any of these situations applies, the charity must provide you with a written acknowledgment within 30 days after the contribution is made.
Deductions of $250 to $500
If you are claiming a deduction of at least $250 but not more than $500 for a vehicle, the acknowledgment from the charity must include:
- the name of the charity
- a description (but not value) of the vehicle, and
- a statement as to whether goods or services were provided in return for the donation.
To learn more about deducting charitable contributions, see Nolo's Charitable Contribution Deduction area.