Tax Savings on Donating a Car
Donating a car can save you the time and hassle of listing it for sale and finding a buyer. In addition, it can also save you money on your income taxes. Knowing how the donation value is calculated, and how it will affect your income taxes, can help you pick the best charity and the best year to make the donation for tax purposes.
Valuing the Donation
The value of your car donation deduction varies depending on how the charity uses the car. Ideally, the charity uses it for its purposes because then you can deduct the fair market value. However, if the charity sells the car, you're limited to deducting just the amount the car sells for at auction. For example, pretend you're donating a used car with a fair market value of $7,000. If you donate it to a charity that uses it, such as transporting children to after-school events, you can deduct the full $7,000. If the charity sells it for $5,000, you can only deduct $5,000.
When you make the donation, the charity should give you a Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes that documents your donation. You may also receive a receipt that contains the same information as Form 1098-C to substantiate your donation. If the car is used by the organization, you must get the 1098-C within 30 days of the donation. If the charity sells the car, you must receive the 1098-C within 30 days of the sale.
To claim the deduction for donating a car, you must itemize your deductions and forgo the standard deduction. Depending on your other itemized deductions, such as state and local income taxes, other charitable donations and mortgage interest, you may already plan to itemize. However, if the total of your itemized deductions, including your car donation, doesn't exceed the value of your standard deduction, your car donation won't save you any money because you'll be better off claiming the standard deduction.
Lowering Taxable Income
If you do itemize your deductions, the amount by which your car donation reduces your taxable income depends on your other itemized deductions and your standard deduction. If you other itemized deductions exceed your standard deduction, the full value of the donated car reduces your taxable income. However, if your other itemized deductions are less than the standard deduction, only a portion of the donated car value will actually lower your taxable income. For example, assume your standard deduction is $9,000 and your car donation deduction equals $7,000. If your other itemized deductions total $10,000, the car donation reduces your taxable income by the full $7,000 because you would have itemized anyway. However, if your other itemized deductions total only $6,000, your car donation only lowers your taxable income by $4,000 because if you hadn't made the donation, you would have used the standard deduction instead.
The amount you save in taxes depends on your income tax bracket. The higher your bracket, the greater your savings. For example, if your car donation reduces your taxable income by $7,000 and you pay 35 percent in taxes, your donation saves you $2,450 in taxes. However, if you only pay 20 percent, your donation only saves you $1,400.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."