You’re driving down the road when suddenly you see it: the car of your dreams! There it is with a “For Sale” sign on it!
You screech to a halt and get out to examine it. Pristine! No rust, no wear and tear, low mileage. You have to have it!
You make the deal, and bingo! You now own two cars, only one of which you want.
So, what do you do now? Sell the extra car? Not likely. Too old, too beat up. Okay, then donate it. There’s a fire department/children’s charity/public radio station out there that will benefit.
So, how do they benefit exactly, and how could you possibly benefit on your taxes?
This used to be a wide open game, with taxpayers claiming they were donating vehicles (including not just cars, but motorcycles, boats and even airplanes!) worth many thousands of dollars. Donors simply referred to printed guides like the Blue Book to determine resale value and that was the number they claimed.
The rules that guide valuation of donations changed a number of years ago. The IRS was no longer willing to allow donors a huge deduction for something that the donee organization might gain only a few hundred dollars benefit from.
Now the rule is that the donee organization must report back to the donor the value of the benefit they derived from the donated item, provided the item has a fair market value of more than $500. If the donated item is a car with a fair market value of $1000, for example, then the donee organization has the choice of (a) using the vehicle in its mission (delivering meals on wheels, for example) or (b) improving the vehicle to increase its value, (c) selling the vehicle for more than $500, but still at a below-market price, or (d) donating the vehicle as-is or after being fixed up to a person in need.
The donee is required to use form 1098-C to confirm to the donor which path it has chosen. If they choose (a), then the donor can claim fair market value for the car as their itemized deduction. If they choose (b) the donor can also claim a deduction for the fair market value of the car. If they choose (c) the donor can claim either the fair market value of the car as of the date of donation or the amount the car was sold for, whichever is less. If the choice is (d), fair market value may be deducted by the donor.
All of this pre-supposes two things. First, the fair market value of the donation must be less than the donor’s basis in the vehicle. Second, the donor must meet the requirements to be able to itemize their deductions on schedule A, which is where charitable deductions are taken.
