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Giving your Car to Charity?| tax CPA discusses Form 1098-C |Schedule A Car Gift tax examples

tax implications of giving your care to charity

Gary Bode, CPA: here's the tax perspective on donating your car the charity. (910) 399-2705.

Tax CPAs saw more Form 1098-C (s), Contributions of Motor Vehicles, Boats and Airplanes, during the past two tax seasons. Let’s look at a personal contribution of a car to a charitable organization, a Church for example . This post doesn’t cover business donations of a car.

The technique of giving your un-wanted vehicle to charity often makes headlines, usually touting the tax benefits of these transactions. Giving your car to charity is great, but don’t expect a large tax impact. You generally lose money donating a car to charity. Here are the details to help you decide between selling your car or giving it away.

“IRS tax deductions are seldom what they seem. The explanations and examples below outline the common scenarios when gifting a car to your Church.” 
– Gary Bode, tax CPA

You can only Deduct Half the Car’s Value

Your tax CPA uses the gift of a car as a non-cash charitable contribution on line 17 of Schedule A, Itemized Deductions, which attaches to Form 1040. Here the first cut is the deepest; only 50% of the car’s value is potentially deductible in the Gifts to Charity section.

The Total amount of Schedule A deductions must exceed the Standard Deduction

Schedule A is a typical IRS form. There are seven sections, all with their own rules. Medical cost is a good example; there’s the infamous 7.5% of Adjusted Gross Income floor limiting the deduction. The total of all seven sections of Schedule A must exceed the Standard Deduction to get any tax impact.

Differences in Valuation of the Car

The car’s donation value is the Fair Market Value. But your Church is not in the used car business. So they probably use a third-party to sell your car. If so the value of your gift is limited to the sales price, less 50% per Schedule A. You avoid this limitation if the Church (as an example) sells your car itself or gives it to a needy parishioner. If you’re claiming a value over $5000, the IRS requires a qualified appraisal.

Documentation

The Church has to acknowledge your Gift to Charity within 30 days. Usually that’s on Form 1098-C, which it sends to you and the IRS. A recent tax court case makes the 30 day rule a deal breaker. I also suggest taking pictures of the car and keeping the sales receipts to prove you owned the car. Why? In an audit, the IRS Agent will want to see proof.

Tax Savings are less than Tax Deductions

Your actual tax savings is worth your marginal tax rate times the value of half the car – see below. Many folks think a tax deduction equals the tax savings amount. If you have less tax due than the tax savings from the gift, you get no tax impact below $0 tax liability – see below.

Bad Tax Examples of Donating CarsYou give your car to a friend down on his luck. No tax deduction is available; your friend is not a charitable organization.

  • You donate a car worth less than double your Standard Deduction. And say you have no other itemized deductions. You get no tax relief since you get the Standard Deduction anyway.
  • You donate your car and don’t keep the proper paperwork. If audited you get no tax deduction, plus penalties. Ouch.
  • You have $100 of tax due before the gift of the car. The car donation saves you a potential $300 in tax. You lose the other $200 (300-200) in the current tax year but you can carry that forward to future tax years.

Best Tax Scenario car’s Fair Market Value is $10,000

I understand charitable giving isn’t just about tax savings. But here’s the IRS perspective.

  • You donate a $10,000 car as a Gift to Charity.
  • The Church provides required IRS documentation.
  • Your other itemized deductions already exceed the standard deduction.
  • You have enough tax due, before the car donation, to benefit from the tax savings of the car donation. Let’s say $3,500 of tax due in 2013.
  • Now there’s a $5,000 tax deduction on Schedule A (10,000 FMV x 50%) from donating your car.
  • Your Itemized Deduction on page two of Form 1040 increases by $5,000.
  • Therefore your taxable income decreases by $5,000.
  • Your tax rate is 30%.
  • You save $1500 in taxes ($5,000 X 30%).
  • Your final tax bill is now $2,000 (3,500-1,500).
  • You could have sold the car for $10,000. You lost $8500 (10,000 – 1,500)by donating it to the Church.

I’m a tax CPA with a virtual office to provide you services wherever you live. (910) 399-2705.

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