It's easy to donate a car to charity if all you want to do is get rid of it. Simply call a charity that accepts old vehicles, and it will tow your heap away.
If you want to maximize the benefits for both the charity and yourself, however, it's more complicated. Until 2005, it was easy for taxpayers to deduct the entire "fair market value" of a donated vehicle from their taxable income, reducing the taxes they'd have to pay to the Internal Revenue Service. (The IRS defines fair market value as "the price a willing buyer would pay and a willing seller would accept for the vehicle, when neither party is compelled to buy or sell and both parties have reasonable knowledge of the relevant facts.")
Allowing taxpayers to deduct the full fair market value for all those donated vehicles cost the IRS a lot of dollars, however, so the agency tightened the rules. Today, you can only deduct a vehicle's fair market value under very specific conditions. We're going to walk you through those conditions, with the usual proviso that you should discuss these issues with your tax preparer before you act. Also note that if your state or locality also levies income taxes, other rules may also apply.
You Must Itemize Your Return
If you want to claim fair market value for your car donation to reduce your federal income taxes, you must itemize deductions, says Twila D. Midwood, an enrolled agent based in Rockledge, Florida. An enrolled agent is a tax expert who can represent clients before the IRS.
If you've always filed 1040EZ tax returns and you plan to keep filing them, you won't be able to deduct any amount for the car donation. You can file a regular 1040 tax form and itemize, even if the donated auto is your only deduction. That's usually not the best choice, however, unless you like paying a lot more taxes to the IRS than you must.
"For tax purposes, because a donation is a deduction from your income, the tax benefit relates to your tax bracket," Midwood says. "It's not a dollar-for-dollar item."
Here's the math: Suppose you are in the 28 percent tax bracket. Your donated car's value, and thus the deduction, is $1,000. "The $1,000 deduction will save you $280," Midwood says. If you're in the 15 percent tax bracket and you donate a car worth $1,000, it will only reduce your taxes by $150.
If instead you take the standard deduction, which in 2012 was $5,950 for a single individual or $11,900 for a married couple filing together, you save thousands of dollars over filing an itemized return only for the purposes of detailing your car donation.
The only way that donating a car nets you any tax benefit is if you have many deductions, and if their total sum, including the car, exceeds your standard deduction.