5 Tips Before Donating a Car to Charity

Whether it's to a veterans group, a medical foundation, a faith-based organization or other charity, donating a used car can be both useful to the organization and its mission, as well as a potential tax-saving benefit to the giver. But there are some key factors to consider, which is why auto and tax experts remind those considering such donations of a few tips before they hand over the keys.

"Until 2005, donors could simply deduct the 'fair market value' of the vehicle, but today's rules are much more stringent, and it's nearly impossible to deduct the full market value," says Edmunds.com Consumer Advice Editor Carroll Lachnit. "Understanding the proper procedures can help donors get the most out of their deductions and -- more importantly – avoid penalties if audited."

Even for those who don't make the decisions with a tax deduction in mind, the benefits are worth looking into after the fact. Other tips:

Know How Much to Claim – Many people think they can deduct the "fair market value" of their car when they donate it to a qualified charity. However, under current rules you can only deduct the amount that the charity confirms in writing. Unless your car is in good or excellent condition and used by the charity in its business (and by one estimate, non-profit organizations choose to keep no more than five percent of donated vehicles), the charity will most likely sell it at auction or to an auto salvage yard. In that case, your deduction is based on the car's selling price, which in some cases may be close to zero.

Choose a Qualifying Charity – A qualified charity is one that has been approved by the IRS as an "exempt-status" or 501(c)(3) organization. Many religious organizations also qualify, even though they aren't required to file for 501(c)(3) status. A comprehensive list can be found on the IRS's exempt organizations site. There are also many fraudulent organizations that may try to take advantage of potential donors, so do a little research on the charity, and make sure that the person you coordinate with is an authorized representative.

Itemize Your Tax Return – If you want to claim your vehicle as a tax deduction, you must itemize your return, even if the car is the only deduction. But if the sum of your itemized deductions (including the car) does not exceed your standard deduction, then you might not want to claim itemized deductions after all.

Save Your Paperwork – The tax benefits for a donated car require a lot of documentation, whether the car is junked, sold at auction or given to a charity's client. Keep all these papers or electronic files because you'll need them at tax time. IRS Publication 4303 has all the details.

Consider an Alternate Approach – Instead of donating the car outright, consider selling the vehicle yourself and donating part or all of the proceeds. While this process certainly takes more effort on your part, it generally leads to the highest return on your car's value, which benefits both you and your charity of choice.

While these tips can serve as a helpful guide, those who hope to deduct a charitable gift (including a car) should consult with a tax professional before they file their return.