impossible to overemphasize the feel-good aspect of donating your car. It can be quite uplifting to provide assistance to others.
Also, what goes around, comes around. By providing this kind of generosity to others, you may just boost your karmic chances of being on the receiving end of a good Samaritan's kindness should you ever need help in any way at some point in the future.
Helps a good cause. There are many charities out there, and they're all doing their part to make the world a better place. Whether your passion lies with supporting the needy, animals, or the environment, if you donate your car to your preferred charity, you'll help further your cause.
Can provide tax benefits. Donating your car can save you money when tax time rolls around. Keep in mind, though, that the IRS doesn't recognize donations made to all charities. For your donation to ease your tax burden, it must be made to an organization deemed eligible by the IRS to receive tax-deductible charitable contributions. The IRS site offers a useful tool allowing you to check the status of your favorite charities.
Can be simple. If you're donating your car purely to take it off your hands and provide assistance to a charity, the process couldn't be simpler. All you need to do is alert the charity of your intention, and the car will be picked up at your doorstep.
If you'd like to realize optimum tax benefits with your donation, the process is considerably more complicated, which leads us to the cons of donating your old car.
Donating your car: Cons
Tax benefit may be too small to justify the effort of deducting your donation.When donating your car, the IRS allows you to claim your vehicle's full market value in certain cases, but stringent guidelines make qualifying for this a rare occurrence. In most cases, deductions in this area are limited to the amount the vehicle was sold or salvaged for by the charity, which is typically much less than its market value.
If the car is sold by the charity as part of a batch, the organization will receive a flat fee for each vehicle. This fee may be as low as $45.
According to rules posted on the IRS site, you may claim fair market value for your car donation only under the following circumstances:
• The charity makes "significant intervening use" of your car. This refers to cases in which the charity used the car to deliver meals to the poor, for example.
• The charity "makes a material improvement" to your car. This goes beyond minor upgrades and refers to repairs impacting the value of your car in a major way.
• The charity "donates or sells the vehicle to a needy individual at a significantly below-market price." This applies to cases in which the charity uses the vehicle to directly assist indigent individuals in dire need of transportation.
Achieving tax benefits can be tedious and time-consuming. If you're in the habit of submitting your tax returns via a 1040EZ, this will need to change if you're donating your car. You'll have to itemize your deductions if you intend to use your car donation to lower your tax burden, and this adds complexity to the tax-preparation process.
It's also important to realize you probably won't get swift closure when handling the tax paperwork associated with your car donation. As previously mentioned, in most cases, you'll need to claim the value at which your car was sold for by the charity. This means you'll need to wait for the sale to take place, and this could take weeks or months. After the sale occurs, the charity will send you a receipt detailing the sale price.
If the sale doesn't take place in time for you to include the car's sale price with your tax return, you can delay your return by filing a six-month tax extension, which will give you time to receive the car's sale price from the charity. Your second option is to file the return on time without claiming the deduction. Once you've received the car's sales price, you can follow up with an amended return that includes the deduction.
May trigger an audit if you use the donation to claim tax benefits. According to information published by CharityWatch, a charity watchdog founded more than 20 years ago, non-cash donations are one of the IRS' most commonly used indicators when deciding whether to initiate an audit.
If you're deducting your car donation on your taxes, keep careful records, and hold on to your receipts for a few years after filing your return. The IRS will look at three years of tax returns in an audit and will go back as far as six years if "substantial error" is identified.
Make an informed decision
Whether you decide to trade in your car, donate it, or sell it to a private party, knowing the risks and benefits of each approach will help you make an informed decision.
Whichever approach you choose, know that in the end, it's worth the effort. Disposing of your old car will help you make room for a new vehicle equipped to take you on fresh adventures.