Okay, that old rusty buggy that still looks like a car has been taking up too much room in your driveway for far too long. It's now a regular part of the neighbourhood. You've been able to ignore it, but your neighbours are starting to get annoyed. You've taken the hit and know it's time to get rid of the problem, but how?
Why don't you call a charity and see if they want to take the car as a donation? Giving your car to a charity is not only good for your karma, but it can also help you keep some of your cold hard cash in the bank come tax time by letting you take a potentially large deduction. If you ask around, you'll find that a lot of charities have set up ways to accept cars as donations.
As you might guess, the IRS has some complicated rules. It's not as easy to get a tax break by giving a car to charity as it used to be. You could write off the fair market value of a car you gave to charity under the old tax laws. Fair market value was set by standard services in the auto industry, like the Kelly Blue Book. If the Blue Book said your car was worth $2,000, you could write off the whole amount on your taxes. People abused that system, though, and claimed that their donations were worth $654 million more than they really were in just one year. So, in 2005, the law changed, and the IRS now has some rules about how donation deductions can be used.
The basic rule is that the IRS won't let you deduct more than $500 for donating a car. If your donation is worth more than that, you will have to meet a few requirements before you can get a tax break for it. First, you need to know how your car is being used by the charity. If they take it from you and sell it, you can use the amount they got for it as a deduction, even if it's less than the car's value. If the charity sells your car for more than it's worth, you can only get a tax break for the car's fair market value.
A few things are different. If the charity decides to give the car to a poor person or sells it to a poor person for a lot less than what it's worth on the market, you can usually claim the car's actual value as your deduction. Also, under the "Intervening Use Exception," if the charity uses your car for awhile before selling it, and then sells it for below the fair market value, you can claim the value of your car at the time of the donation as your deduction, since their use of the car lowered the value.
But if the charity fixes up the car to make it more valuable and then sells it for more than it was worth when you gave it to them, you can only claim the car's fair market value at the time you gave it to them. No matter what your situation is, the charity should tell you in writing within 30 days of receiving the car what they plan to do with it and what the donation value is. If they sell the car, they have 30 days to tell you in writing how much they got for it.
Of course, deductions don't just take money off your tax bill. Instead, they let you lower your bill by a certain percentage. How much a deduction will lower your taxes depends on how much you make, what tax bracket you are in, and how you file.
