During these financially-stricken times, you are probably looking for ways that you can reduce the amount of taxes that you pay in a year. One way that you can do this is by availing of a car donation tax deduction.
The Basics of A Car Donation Tax Deduction
To understand what a car donation tax deduction is, you need to have a good knowledge of basic tax procedure. Every year, you earn a particular amount of income, known as the “gross income“. The U.S. Internal Revenue Service (or IRS) allows certain deductions from your gross income. Once all these deductions are made, you now have your “taxable income“. By checking the tax tables at the IRS website, you can determine the percentage of tax that you will have to pay.
When it comes to tax deductions from car donations, you will need to consider the two basic types of deductions, namely the standard deduction and the itemized deduction. In the standard deduction, you are deducted a fixed amount — $4,850 for single individuals and $9,700 for married individuals (as of 2004). Itemized deductions are those extra deductions that you will avail of, such as medical and dental exercises, interests on home mortgage payments, etc. In order to qualify for a car donation tax deduction, your itemized deductions should be greater than your standard deduction. This means, you will need to have a complete and well-documented list of itemized deductions before you can avail of a tax cut for a vehicle you donate to charity.
How to Determine Your Tax Deduction
As of 2005, the IRS has simplified the means by which you can determine the tax deduction for your car.
If, upon donation of your vehicle to charity, your car is sold at an auction for more than $500 dollars, the value that it has been sold for will be your deduction. For example, if your car was sold at the price of $2,500, you will get a tax deduction of $2,500.
What if your car sells for $500 or less? You have the option of deducting the price that the vehicle sold for at auction OR the fair market value of the car. For example, if your car was sold at an auction for $350 but it has a fair market value of $400, you can either go for the auction price or choose the fair market value as a deduction. Most individuals who have donated their cars in the past recommend that you go for the fair market value instead.
Finding A Charity
It should be mentioned that not all charities are capable of handling donations of cars, trucks, motor homes, boats or other vehicles. To get a complete list of qualified charities, visit the IRS website and check out Publication 78. Take note though that churches, temples, mosques, synagogues and governments are not listed in Publication 78, even if donations to these institutions are entitled to tax deductions. In case of doubt, always inquire first with your local IRS office or agent before making any car donations.
Learn more about the car donation tax deduction today!