Are you taking any income tax deductions?
We love our cars, don’t we? But there comes a time when we are paying more out for those cars than they are giving back to us. We must let go. How best to do that? Sell it? The disadvantage of selling an old used car is that you will have to be around for the tire kickers. In today’s economy, you might also be subjected to bargain hunter negotiating tactics, and haggling over price. You might have to wait for a buyer to sell their vehicle first and there could be other complications. If you need the money right away no matter the amount, well, then selling it is your best option.
How About Making A Car Donation To Get Tax Relief?
Another choice is to donate the vehicle to charity. The IRS allows a deduction for vehicle donations, which I believe is one of those easily overlooked tax deductions. The donation is recorded on the IRS Schedule A under charitable contributions. The amount you receive as a deduction is determined between you and the charity: with help from the online Kelly Blue book website or other car valuation websites, you can figure out what your vehicle’s actual value should be. You will need to fill out some paperwork at the charity, and keep a record of the transaction for tax purposes.
When you have a price figure for your vehicle, and it is under $5,000 (say it’s an inexpensive car or older vehicle) then you can try to pursue the donation on your own. If the vehicle is worth more than $5,000, you will want the vehicle professionally appraised other than by an online valuation.
Taking a Closer Look At Your Taxes
Now once you have the deduction, what does it do for you? People can be confused by tax credits, deductions, and exemptions. Exemptions are tied to the number of people in your family or the size of your household, and they reduce your taxable income. The most well known deduction is the standard deduction, which everyone gets when they file their return. But what if you still have taxable income after subtracting your exemptions and standard deduction?
Other deductions, such as a charitable contribution, are also subtracted from adjusted gross income. A car donation is probably one of the better financial moves to make for people who have a substantial amount of income after subtracting their standard deduction. The beauty of this deduction is that you can use it on any year, but you must own and have title to the car. This is unlike some other deductions — such as educational deductions — which may not always be applicable for your situation on any year. For instance, you may no longer be a student at one point, or may no longer have a child in school after a given year. Same thing goes for the moving deduction, which may not always be available ever year.
Tax credits, on the other hand, are subtracted from the tax that you owe. In general, tax credits are more valued because of their position in the tax return process. Not everyone is eligible for tax credits, whereas most people already have a vehicle, and many of those vehicles may not be in the best of shape. Much is made out of tax credits, but they are not always available to everyone. But vehicle donations are typically easy to claim on any year.
I can think of no other item to donate to charity which will give you such substantial tax relief. When it’s time for the car to go, it’s time. Some charities even fix the vehicle up, and give the car to needy families and people who are currently without a vehicle but need a car for driving to work.
You do have to wait to receive this money in your tax refund until after you file your taxes, so a good idea is to plan this deduction ahead of time by donating the car towards the end of the year. That way, you’ll only be missing a car for a few months. If you made the donation at the very end of December, and then file your tax return right away in the middle of January while renting a car or taking the bus, then you’d be making a very savvy move.
Those who expect to owe a large tax on a given year can certainly benefit by the vehicle donation, especially if you’ve got an older spare car sitting around that you could do without. Here’s more on how to claim your tax deductions when you contribute to charity.
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{ 19 comments… read them below or add one }
Several hundred thousand Americans donated their cars to charity this year in the form of “Cash for Clunkers”! 🙂
What’s getting me REALLY excited is Obama’s “Cash for Home Remodeling” initiative he proposed yesterday! I’ve always wanted to redo my kitchen, and if the government can save me $10-20,000, that’s better than a poke in the eye!
Go big government go!
Sam
This makes sense if you’re trying to do some good with the donation, but from a pure dollars and cents perspective, it doesn’t get you maximum value. The value of the deduction is (tax_rate * value_of_car). So if you’re in the 15% bracket and the car is worth $5000, this means you’ll get an additional tax refund of $750. You could sell the car for half its value and still come out way ahead.
You can’t take the standard deduction AND receive tax relief from the car donation. This is because charitable contributions are itemized deductions and a taxpayer is only allowed one or the other: Standard Deduction OR Itemized Deductions. Also, many taxpayers are not even eligible to itemize, so it’s important to point out that even though you donate a car, you might not be able to claim it as a deduction.
One other thing is that educational deductions are actually educational CREDITS or ADJUSTMENTS to arrive at AGI. There are no educational itemized deductions (with the exception of job retention education). Educational credits ARE available to ANY taxpayer (i.e. you don’t have to itemize to claim them) if they meet the rules for that year for those credits/adjustments.
@Carrie,
True! Thanks for the clarification. I itemize my tax return so I do not get the standard deduction. We all need to be cautious with the tax code and all the nitty gritty. The way I deal with it? Either use great software or have a tax expert help you if you’re going beyond the EZ form or standard deduction.
I agree with Kosmo, selling the car will probably yeild the most bang for your buck.
My company tried to do this last year and found that the charity sets the price you get. You do not get Kelly Blue book value. You get whatever the charity decides to give you. I was told that they often sell the cars at auction to make money for the charity. In our case the car was worth $3000.00 but we were told that when it sold we would get less than a third of the amount to write off. Your car could be worth quite a bit according to various sources but do not expect the charity to give you what it is worth. This is a case where it is worth it to sell the car and donate the money to a charity of your choice.
You’ll get a tax deduction of at least $500 when you donate your car to charity. Cars4Charities has hundreds of worthy charities to choose from. The process of car donation is easy and the pickup is free. You can also donate a car that doesn’t run.
Thanks to those who commented. All good thoughts. Remember, as I was saying there is a disadvantage to selling your vehicle on your own: you might be haggled down on the price.
I recently donated my own vehicle to a program called Workers on Wheels, so I knew it was going to a good cause — someone who needed a vehicle to drive to work. The charity pays to fix the vehicle up and they preferred a vehicle less than 10 years old which my vehicle was. The donation value was exactly the same as a Kelly Blue Book value. I may have confused some of the credits/deductions lingo and itemizing. True, if you do not itemize, you cannot take advantage of charitable donations.
I never heard of getting the blue book value of the car as a charity donation. I was always told it was much less. It is definitely a nice gesture and I am a proponent of donating to charities. However, it doesn’t make a ton of financial sense.
True, you might get haggled down, it’s unlikely that you’ll get haggled down below the level of the tax benefit. If you’re in the 15% bracket, you’d be dead even if a buyer gave you 15% of the deduction you get from the donation (since this is a deduction, rather than a credit). $750 for a car that nets you a $5000 deduction, for example. You could be the worst negotiator in the world and still be able to get this price out of your car.
Obviously, though, there are non-financial benefits to donating to a charity.
Another option: sell the car at KBB to a relative who really needs the credit. This is legal.
Many people operate from the stand point of, the government has something in for all of us. Well, that is not always the case. They want us to succeed. That is the whole idea behind giving tax breaks in the first place. The bad people here are those who avoid taxes illegally — not those who donate or charities.
Another blog on here or another site thesmarterwallet.com suggests the difference between cheap and frugal. Cheap is lowest price at any cost. Well, let’s reverse that… highest price at any cost. What is getting the maximum dollar value worth to you? On the other hand, donating your vehicle for a tax credit removes a lot of hassle… it is a prudent action to take, which is the equivalent of being frugal with your finances.
Uh, I’m not trying to beat a dead horse here, but you used the word credit twice in the last response, which concerns me a bit.
Credits and deductions are VERY different things. A credit is a dollar for dollar savings on taxes. That is to say, a $1000 tax credit puts $1000 in your pocket.
On the other hand, a deduction simply reduces taxable income. This means that a $1000 deduction (such as a charitable contribution) allows you to avoid having $1000 of earnings taxed at your marginal rate. If you’re in 15% bracket, a $1000 deduction puts $150 in your pocket ($1000 is not taxed at 15%, meaning that you are not taxed $150 on that $1000).
My point was that you didn’t need to get maximum value out of a sale in order to come out ahead financially ahead. You could probably sell the car in a day by advertising it at 30% of KBB with very little hassle – and you’d still have more money in your pocket than getting a deduction of KBB value.
Of course, you get the “I did something good for a charity” feeling by donating, which may offset the financial side of things.
No offense intended – just trying to make sure people don’t confuse credits and deductions (which, indeed, are often confused by large segments of the population.)
Thanks for the clarification Kosmo. My understanding is that any donation to charity is considered a tax deduction.
In the UK, the Government introduced a scrappage scheme whereby if you decide to buy a new car, you can have £2000 towards it in exchange for your old car, no matter what the old car is worth.
Of course – cue plenty of people trying to play the system by buying cheap and almost worthless used cars for next to nothing and getting value towards a new car…
On the plus side, it generated a ton of new business for a car industry that looked to be in a LOT of trouble 12 months ago. And the negative, demand is beginning to outdo supply and trying to order a new car is turning into something of a nightmare.
Oh well… we can’t have it all ways can we!?
Great article,thanks for the great advice, I prefer giving all my tax bills to my accountant; he helps find me many loop holes that can save me tax money.
Car donation tax deduction is limited to the full price that charitable organization receives for the sale of donor’s vehicle.
Those wooden cars are sooo cute! Will i have one of those when i donate? hehe
Always remember that when making a car donation we should only lend our old vehicle to a very reputable non-profitable organization. As far as I know, Wheels for Wishes car donation program is one of the best and they benefit your local Make A Wish Foundation that in turn grants wishes of children who have life threatening conditions. By donating your car you’ll get a charitable tax deduction and most importantly the fact that they’ve contributed something to those in need.
Donating your car for a tax deduction is a great way to save some money each year. And if you wanna help save lives, you can donate it to the national kidney foundation, help save someones life and still get a massive tax deduction.