Perhaps you’ve seen an ad or billboard that goes something like this: “Donate your vehicle or boat and receive a great write-off in return. Free towing included.” These solicitations sometimes imply that by making such a donation you’ll reap a better benefit than if the item is sold and the proceeds donated to charity. The reality is that this just isn’t true. There’s almost never any tax difference between donating a personal vehicle to charity versus selling it at retail and donating the proceeds. However, there may be a nontax benefit of giving the vehicle to charity – you avoid the hassles of a sale.

The IRS and Congress are both concerned that taxpayers are abusing the charitable contribution rules with respect to vehicles by overvaluing what they are giving away. As a result, the IRS recently released a new publication reminding taxpayers of the rules. In addition, pending legislation currently before Congress would enact tougher documentation and valuation rules. In case you’re thinking of donating a vehicle to charity sometime soon, here’s a quick summary of the new IRS guidance and the proposed changes that might be coming from Congress.

Tax-Deductible Donations

The IRS offers three key points for donors who give vehicles to charities – make sure you choose a qualified charity, properly value the donated vehicle and get the appropriate documentation. It’s the last two points that cause the most trouble.

Determining Value. The value of a donated vehicle is limited to its fair market value, which doesn’t automatically mean the highest value for the car listed in a used car pricing guide. You have to take into account such factors as the vehicle’s mileage, condition and part of the country in which it’s located. In addition, used car guides normally don’t value vehicles that are in very poor or nonworking condition. Thus, the value of these vehicles will have to come from somewhere else (such as through a salvage or scrap-yard price).

Getting the Proper Documentation. Like other contributions, the support required for a vehicle donation depends on the vehicle’s value.

• For Vehicles Worth Less Than $250. You need some form of written proof that the donation was made to a qualified charity, when it occurred and what was donated.

• For Vehicles Worth $250 up to $5,000. You need a written acknowledgement from the charity that includes the charity’s name, a description of the car and a statement that “no goods or services were provided by the charity in return for the contribution.” If goods or services were provided, the statement needs to describe and value them unless they consist entirely of intangible religious benefits (in which case the statement should say this). These are the same rules that apply when you make a cash donation of at least this amount.

• For Vehicles Worth More Than $5,000. You need the written acknowledgement referred to above plus an appraisal prepared by a qualified appraiser (basically someone with appropriate experience in appraising vehicles who is unrelated to you or the charity receiving the donation).

Pending Legislation

A bill currently pending in Congress would potentially lower the threshold for when an appraisal is required to as low as $250 in the case of vehicle donations. In addition, Congress is considering toughening the documentation requirements by requiring the charity to value the vehicle in the acknowledgement it provides the donor. Both provisions are currently proposed to be effective retroactively back to mid-summer. However, if Congress does follow through with these changes or something similar to them, the effective date is likely to be no earlier than this fall.

Conclusion

Vehicle donations have been on the IRS’s radar for several years – mainly because of perceived abuses in how taxpayers value the donations. However, in the right circumstances, they’re a nice way to get rid of an unwanted vehicle and benefit your favorite charity at the same time without the hassle of selling the vehicle. If you’re thinking of donating a vehicle in the near future, let us know so we can help you make sure you follow all the tax rules and get the maximum deduction allowed.