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Donate Your Junk Car

If you have a car that you want to get rid of but missed your opportunity to trade it in during the cash-for-clunkers program, there is still a smart financial way to get rid of that car. Many charities will accept your car as a donation. This enables you to get that unwanted car out of your driveway or garage and find a way to reduce your tax bill. Here are a few things you should know before you donate your car.

First, select a charity you want to help. You can search the internet for charities that accept cars as donations. From that list, find one that supports a cause you care about and one that is efficient. Too many charities spend the proceeds from the donation on administrative costs. There are several websites that will help you filter out inefficient agencies. In general, you want to find a charity that uses less than 15% of proceeds on administrative costs, ideally, the number should be less than 10%.

Second, find a qualified charity. Your unemployed Uncle Fred doesn’t count as a qualified charity, regardless of how you feel about him. Ensure that whatever charity you select is an IRS recognized 503(c) charity. Many charities will even handle a lot of the paperwork for you.

Third, determine the value of the car. This is crucial for tax purposes. In order to do this, you need to know how the charity will use the car. Essentially, your tax deduction is the fair market value of the car. But how do you determine fair market value? First, if the charity auctions your car for the donation and the car is sold for more than $500, then the fair market value is whatever the car sold for at auction. If the car sells for less than $500 or the charity doesn’t auction the car, things become a bit more complicated. You must find a reasonable way to estimate the fair market value. You could do this by using a website such as Kelly’s Blue Book.

Just make sure that you can truly justify the amount you list on your tax form as the fair market value of the car. Before January 1, 2015, anyone making a donation could pretty much value the car at anything they wanted with little guidance. To avoid tax cheaters, the IRS provided more strict guidance.

Lastly, remember that you must itemize your deductions in order to take advantage of this car donation deduction. If you use the standard deduction because it is higher than the itemized deductions, then there is no tax advantage to donating your car (although it still benefits the charity and you’ve done a good deed).

Once you’ve donated your car, make sure you get all applicable paperwork and store it in a safe place. If you donate your car in July, but can’t find the paperwork when you are doing your taxes next April (if you are like me and wait until the last minute), you may forget the deduction and not be able to take advantage of it. And store those records for 7 years in case you get audited.

If you follow these guidelines, your car donation can be rewarding not only for the charity but also for you come tax time.

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