What are the Tax Benefits of Donating Your Car?
How much you can deduct depends on whether the charity sells it or keeps it.
Donating a car to a legitimate charity can net you a tax deduction that could reduce your federal tax bill or increase your refund. Here's a look at the tax benefits associated with car donation and how the IRS evaluates the vehicle’s value. Of course, it’s a good idea to consult a tax professional if you have questions or need more information.
Will the Charity Sell the Car?
The IRS uses two primary methods to determine the tax benefit associated with a donated vehicle. The charity may decide to sell the car or truck you gave it and use the proceeds to fund its operations.
In this case, the amount that you’ll be able to claim as a tax deduction usually is limited to the sales price of the vehicle, even if the amount raised by the sale is lower than the vehicle’s fair market value. If the price drops below $500, most of the time it's possible to claim at least that much. Then the deduction allowed is either the $500 or the fair market value, whichever is less.
Will the Charity Use the Car?
A charity might decide to use a donated vehicle instead of selling it. For example, a charity that builds homes could use a pickup truck to haul materials, or an outreach program might use a donated van to transport community members to an event.
In this case, the IRS will allow you to claim the fair market value of the vehicle as a tax deduction.
Determining Fair Market Value
You can estimate your vehicle’s fair market value by using the NADAGuides and Kelley Blue Book databases. Those organizations regularly survey sales prices and update their databases to reflect what the market currently is willing to pay for a specific model, taking into account mileage, condition, and options.
Donate vs. Sell
Right now, the used car market is on fire, with shortages of new vehicles driving prices sky-high for secondhand models in good condition. This surge in demand also makes it easy to sell an automobile to a private party or a dealership.
If you are in a pinch for cash, since cars are selling for above market value right now, you could receive more money selling the car than donating it. Unless you know if the charity plans to sell or keep your vehicle, and you feel certain of its fair market value, selling it instead of donating it might be a better option to maximize your financial gain.