IRS Rules for Donating a Car: What You Need to Know

Donating a car to charity can be a generous way to support a cause while also receiving a tax deduction. However, the IRS has specific rules that must be followed to ensure your donation qualifies. Failing to meet these requirements could result in losing out on tax benefits or facing IRS issues.

Understanding how deductions are calculated, what documentation is needed, and how to correctly transfer ownership is essential before making a vehicle donation.

Qualifying Organizations

Not every charity is eligible to receive tax-deductible vehicle donations. The IRS requires that the organization be a qualified 501(c)(3) nonprofit, meaning it must be recognized as tax-exempt. Religious institutions, educational organizations, and certain public charities typically qualify, but not all nonprofits do. To verify an organization’s status, the IRS provides an online tool called the Tax Exempt Organization Search (TEOS).

Some organizations, such as political groups and foreign charities, do not qualify for tax-deductible donations. Additionally, certain veterans’ organizations and fraternal societies may only be eligible under specific conditions outlined in IRS Publication 526. If a charity loses its tax-exempt status due to noncompliance, any donations made after revocation will not be deductible, even if the donor was unaware of the change.

Determining the Deduction Amount

The deduction amount depends on how the charity uses the vehicle. The IRS has guidelines determining whether you can claim the fair market value or a different amount.

Fair Market Value

Fair market value (FMV) represents the price a willing buyer would pay a willing seller for the vehicle, assuming both parties have reasonable knowledge of its condition. The IRS allows donors to claim FMV only in certain situations, such as when the charity significantly uses the vehicle rather than selling it. To determine FMV, donors can reference pricing guides like Kelley Blue Book, Edmunds, or the National Automobile Dealers Association (NADA) guide, adjusting for the car’s actual condition, mileage, and location.

If the claimed deduction exceeds $5,000, an independent appraisal is required. The appraisal must be conducted by a qualified professional within 60 days of the donation. Overestimating FMV can lead to audits or penalties, so accuracy is crucial.

Sale by the Charity

Most charities sell donated vehicles and use the proceeds to fund their programs. If the organization sells the car without making significant improvements or using it for operations, the donor’s deduction is limited to the sale price. For example, if a car with an estimated FMV of $4,500 sells for $2,800, the donor can only deduct $2,800.

The charity must provide a written acknowledgment, typically IRS Form 1098-C, stating the sale price and confirming that the vehicle was sold in an arm’s length transaction. If the charity sells the car at a discount to a low-income individual as part of its mission, the donor may still be able to deduct the FMV, depending on how the charity documents the transaction.

Significant Use by the Charity

If the charity keeps and actively uses the vehicle for its operations, the donor may be able to deduct the FMV. Significant use means the organization must regularly use the car for its charitable work, such as delivering meals or transporting clients. Simply holding onto the vehicle does not qualify.

The charity must provide a written statement confirming how the car is being used, how long it will be retained, and that it will not be sold before substantial use occurs. If the organization makes material improvements to the vehicle before selling it, such as major repairs that increase its value, the donor may also be able to deduct the FMV. Routine maintenance like oil changes does not qualify.

Required Documentation

Proper documentation is necessary to claim a deduction. Donors must obtain a written acknowledgment from the charity, including the organization’s name, a description of the vehicle, and a statement confirming whether any goods or services were received in exchange for the donation. If the donor received anything of value, such as a gift card, its estimated value must be specified, reducing the deductible amount.

For vehicles valued above $500, IRS Form 1098-C must be completed and attached to the donor’s tax return. This form, provided by the charity, includes details about how the vehicle was used or sold. If the charity sells the car, the form must state the gross proceeds from the sale. If the organization retains the vehicle for operations, the form will indicate this, allowing the donor to claim the FMV. The IRS requires this form to be submitted within 30 days of the sale or, if the vehicle is not immediately sold, within 30 days of the donation.

For high-value donations exceeding $5,000, a qualified appraisal is required. The appraisal must be conducted by a professional who regularly assesses vehicle values and must be submitted along with IRS Form 8283, Section B. The appraiser’s credentials and a detailed description of the vehicle’s condition must be included to justify the claimed value. If the IRS determines that the appraisal was inflated or not conducted by a qualified professional, it may reject the deduction or impose penalties.

Filing Obligations

Claiming a tax deduction for a vehicle donation requires accurate reporting on the appropriate IRS forms. For deductions exceeding $500, the amount must be reported on Schedule A of Form 1040, which is used for itemized deductions. Since the standard deduction has increased significantly in recent years, only those who itemize will benefit from claiming a vehicle donation.

Deductions for donations to public charities cannot exceed 60% of adjusted gross income (AGI), though vehicle donations are typically subject to a 50% limit. If the deduction exceeds this limit, the excess may be carried forward for up to five years, provided the taxpayer continues to itemize deductions. Proper recordkeeping is necessary to track carryover amounts.

Title Transfer Considerations

Properly transferring the vehicle’s title ensures legal ownership is fully relinquished and prevents future liability issues. If the title remains in the donor’s name after the donation, they could still be held responsible for parking tickets, toll violations, or accidents involving the vehicle. Each state has its own requirements for title transfers, so donors should check with their local Department of Motor Vehicles (DMV). In most cases, the title must be signed over to the charity, and a release of liability form may need to be submitted. Some states also require the donor to remove the license plates before completing the transfer.

Charities that regularly accept vehicle donations often handle much of the paperwork, but donors should ensure everything is completed correctly. It is advisable to obtain a copy of the signed title transfer and any DMV confirmation that the vehicle is no longer registered under the donor’s name. If the charity resells the car, ensuring the title is properly transferred to the new owner is equally important. Some organizations may delay the transfer, leaving the donor legally responsible until the sale is finalized. Keeping detailed records of all documents related to the title transfer can help avoid unexpected legal or financial complications.

Recordkeeping

Maintaining thorough records of a vehicle donation is necessary in case of an IRS audit. Donors should retain copies of the title transfer, written acknowledgment from the charity, and any required tax forms such as Form 1098-C or Form 8283. These documents should be kept for at least three years, as the IRS generally has this timeframe to audit tax returns. However, for substantial deductions, keeping records for up to six years may be prudent.

Detailed records should also include any correspondence with the charity, a copy of the fair market value determination if applicable, and any appraisal reports for high-value donations. If the vehicle was used by the charity rather than sold, documentation proving its use should be retained as well. Having a well-organized file with all relevant paperwork can help substantiate the claim and prevent potential penalties or additional tax liabilities.