Donate your old car and save money on taxes
You'll get a bigger deducation if the charity uses your car rather than sells it. Either way, be sure to follow the rules and save the paperwork.
This post is by Lynnette Khalfani-Cox of Insurance.com.
Looking to make a smart financial move before the end of the year? Try donating a car you no longer want, need or use.
Donating a vehicle to charity may net you a hefty tax deduction. However, you need to meet certain requirements to qualify for the deduction.
If you're feeling philanthropic, start by deciding on an IRS-approved charity you'd like to benefit. Just remember that the charity you select must be an IRS-recognized 501(c)(3) for you to get a tax deduction.
Consult IRS Publication 4303, "A Donor's Guide to Vehicle Donations," as well as IRS Publication 78, which lists qualified charities. (Religious groups aren't listed, but they qualify as well.)
To go the extra mile, also check the Better Business Bureau's National Charity Report Index. It rates charities based on 20 different accountability standards.
Once you know a given nonprofit meets IRS qualifications, contact the charity to arrange the donation. Most will send someone to pick up a donated vehicle. Be sure to ask how the charity will use the car. Will it simply sell the car at an auction, as is commonly done? Or will the charity actually keep the car and use it -- say, to transport kids or senior citizens?
The distinction is important because the IRS has gotten stricter about deductions for donated cars.
For cars that will simply be sold for cash, you are allowed to deduct only the charity's sales price of the car--not the vehicle's market value. Your deduction is further limited by your marginal tax rate. For example, assume a charity sold a vehicle you donated for $3,000. If you were in the 28% tax bracket, your deduction would be capped at $840.
But you can deduct the full market value of vehicles that will be used by a charity for things like deliveries. So if you give away a car that will be used by the charity, and it has a fair market value of $5,000, your deduction will be $1,400, assuming a 28% tax bracket.
Regardless of how the car is to be used, be sure to get a receipt from the charity. If the charity sells your donated vehicle, it is required by law to send you a notice of the sale within 30 days advising you of the car's sales price.
Once you've donated the car, contact your auto insurance provider to drop the vehicle from your policy.
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