Donating a car or vehicle to charity can be a great way for taxpayers to get a large deduction on their income tax returns. Prior to January 2005, the IRS allowed taxpayers to take a tax deduction based solely on their vehicle's market value. Determining the market value of a donated vehicle was often quite difficult and time-consuming, which made determination of the amount of the tax deduction confusing.
Fortunately, as a result of the tax law that went into effect in January 2005, the IRS has taken the guesswork out of determining the value of your donated car, truck, RV, boat or other vehicle. Generally, if the charity sells your vehicle, your deduction is limited to the gross proceeds the charity receives from its sale.
Determining Fair Market Value
If the charity intends to make significant intervening use of the vehicle, a material improvement to the vehicle, or intends to give or sell the vehicle to a needy individual at a price significantly below fair market value, you will need to determine your vehicle's fair market value as of the date of the contribution.
Fair market value is the price a willing buyer would pay and a willing seller would accept for the vehicle when neither party is compelled to buy or sell nor has reasonable knowledge of the relevant facts.
If you use a vehicle pricing guide to determine fair market value, be sure that the sales price listed is for a vehicle that is
- The same make, model and year,
- Sold in the same condition, and
- With the same or substantially similar options or accessories as your vehicle.
Moreover, the fair market value of a vehicle cannot exceed the price listed for a private-party sale.
Steps to Take Before Donating
State charity officials recommend that the donor take responsibility for transfer of title to ensure termination of liability for the vehicle. In most states, this involves filing a form with the state motor vehicle department which states that the vehicle has been donated. A taxpayer donating a vehicle in Colorado need only complete a vehicle title transfer with their local Department of Motor Vehicles.
If you are considering donating a vehicle to charity and have further questions on the tax deduction you will be receiving, don't hesitate to reach out to us with any questions or concerns.