When you donate a vehicle to charity, you can receive a tax deduction on your income tax return. Wondering how that works? Here's an overview of what you need to know.
1. Charitable Tax Deductions
The Internal Revenue Service allows you to claim a deduction on your tax return for charitable donations. Essentially, the value of the donation lowers your taxable income. As a result, you owe less tax. To put it simply, let's say you have $60,000 of taxable income and you make a donation of $5,000. That $5,000 lowers your taxed income to $55,000.
2. Qualifying Charitable Organizations
A 501(c) (3) organization is the most common non-profit organization. The majority of them are operated in support of religious, educational, literary, and scientific purposes. The advantage of donating a vehicle to a 501 (c) (3) organization is that you may use fair market value for your tax deduction, if the donation is used to support the charity's mission. For example, donating a car to a school will qualify for a fair market value deduction when the car is used for training purposes and is substantially improved in the process.
3. Value of Vehicle Donations
When you donate a vehicle, the amount of your deduction can vary based on the selling price of the vehicle. As of 2017, if your donated vehicle sells for less than $500, you can claim the fair market value of the vehicle up to $500. To illustrate, imagine the fair market value of your vehicle is $1,000. The vehicle sells for $399. In this case, you can claim $500. On the other hand, if your vehicle sells for $399 but the fair market value is only $300, you can claim only $300. If the charity sells your vehicle for more than $500, you can claim the sale price as a tax deduction. For instance, let's say your vehicle sells for $3,000. That is your tax deduction, regardless of the actual value of the vehicle.
4. Qualifying Donations
To claim a tax deduction, you need to donate the vehicle to a registered 501 (c) (3) non-profit organization. If you give the vehicle to a relative, a friend trying to start a business, or to a local organization that is not registered as a nonprofit yet, it is considered a gift and does not meet the tax deductible guidelines .
5. Paperwork
Once you donate your vehicle, you should receive a receipt (form 1098-c) so you are able to claim the deduction on your tax return. Most organizations mail this receipt to you within 30 days after they sell the vehicle, but some organizations can give you a receipt when you drop off your vehicle.
You also need to provide your title -and lien release if necessary - to complete the process.
6. Claim for the Deduction
To claim a deduction for a donation on your federal tax return, you need to itemize your deductions. This means that you take several deductions such as the home mortgage deduction and others rather than just taking the standard deduction. Generally, only homeowners fall into this category. Unfortunately, if you claim only the standard deduction, you can't claim charitable donations on your federal tax return.
Luckily, Minnesota lets you claim a special deduction on your state taxes if you don't itemize and can't claim the donations on your federal taxes. You can claim half of your donation over $500.
7. Trades
Finally, if you get a benefit in exchange for your donation, you will have to subtract the value of that gift from your donation. Imagine you donate to a charity and receive a free radio for your donation. In this case, you will have to subtract the value of the radio from your donation. This is also true if you donate a vehicle and receive a "thank you" gift.
If you're interested in donating your vehicle and receiving a tax benefit, contact Newgate School today. Because we are a registered charity that has been accepting car donations for years, and we make the paperwork easy and the process simple for you. Best of all, when you donate a vehicle to Newgate, you help support our tuition-free mechanic training program and our mission to help low-income adults become self-sufficient.