Tax Tip of the Week
For the week of June 14, 2004

Avoid problems if you donate your car to charity

It sounds like a perfect solution. No more haggling over trade-in value when you buy a new car. Instead, you donate your old car to charity. You get rid of your vehicle and receive a tax deduction, and the charity gets a nice donation. Sometimes it works as smoothly as that. But you should do your homework to avoid possible problem areas.

The charity might not receive as much as you think. Most charities contract with an agent to remove the vehicle and sell it at auction. The agent’s charges for towing, disposing of the vehicle, and administration are all deducted before the charity gets its share. Those costs can eat up a significant part of the value, especially on older vehicles.

You should also take care when claiming your deduction. Of course, you’ll receive a tax break only if you itemize deductions on your return. You should make sure that the charity you choose qualifies for a tax deduction. Look for IRS Publication 78 which lists eligible organizations.

Your deduction is generally equal to the fair market value of the vehicle, although overall deduction limits might apply. Remember that values published in used-car guides are only guidelines. You must adjust the value to reflect the actual condition of your vehicle. Some Web sites can help you estimate an adjusted value.

Keep good documentation to support your estimate in case the value is challenged by the IRS. Photos can be helpful. And finally, make sure you file all required paperwork for an ownership change with your state Department of Motor Vehicles. That can help you avoid any liability issues arising after the transfer.

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