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Donating a car is a good way to get a tax deduction, but increased scrutiny by the IRS means taxpayers need to have a good understanding of the rules related to the items claimed on their return. If you are looking to donate a car to a local charity, be sure to take the proper steps to ensure you get the benefit on your tax return.

There are special limitations and substantiation requirements for a charitable contribution to become an itemized deduction. Charities usually sell the vehicle through a third party and in such cases; the deduction is based on proceeds of the sale, which may be less than what you consider fair market value.

Some of the specific requirements to take a deduction for a donation of a vehicle are:

  • Donations of motor vehicles (including automobiles, boats, airplanes, and motorcycles) with a claimed value of more than $500 needs a written acknowledgement from the organization receiving the vehicle.
  • The acknowledgement must contain certain information about the vehicle and certify that they will be using the vehicle.
  • This acknowledgement must be done within thirty days of the sale or contribution.
  • It then must be attached to the tax return of the taxpayer claiming the deduction.

The deduction you will be allowed to take is the lesser of the fair market value at the time of donation or the gross proceeds that the organization receives from the sale. However, if the charity gives the vehicle to a needy individual or sells it for significantly less than its value, the gross proceeds limit does not apply.

A way to figure the fair market value of the vehicle to be donated is by using an established used-vehicle pricing guide, such as Kelley Blue Book. The vehicle’s value can then be adjusted, but not above the guide’s estimate, for issues such as body damage or engine trouble. This estimate must be reasonable, as the IRS looks closely at these transactions and misstating the value can trigger an audit.

By donating that older vehicle that you plan on getting rid of, you could help out a local cause and save yourself some tax dollars. If you think you might be interested in donating a car to a charity, contact your accountant today, to be sure you have everything in line to get the deduction for it.