Well, it’s the dreaded tax season again – a time when many Americans are on pins and needles wondering how much they’ll owe Uncle Sam. Meanwhile, others are hoping their tax refund will be big enough to take that summer trip to Hawaii or put a down payment on a new car.
But, what if you got hammered this year and desperately need a tax deduction you can use on next year’s returns? Yes, it’s too late to stop the bleeding this year. However, if you’re in a giving mood and want to do a good deed while getting a nice tax deduction in the process, donating that car, truck, or boat you hardly use could be the answer.
Over one million people donate a vehicle to charity every year. Some do it for the tax deduction and others do it to help those less fortunate. Whatever your reason, it’s a win-win for all involved.
To qualify for the deduction you only need to donate the vehicle by December 31st. But, don’t wait until the very last minute as the title will have to be transferred prior to the end of the year. Besides, what’s the point of continuing to pay for auto insurance unnecessarily when you can simply cancel your coverage on the vehicle that much sooner and save a few bucks?
While donating a vehicle may seem as easy as 1-2-3, there are a few valuable tips you may want to follow to do it properly.
Picking a worthwhile charity
If you don’t have a charity in mind, do a little checking. Ask friends, people you work with or family members what their favorite charity is. Should that not prove helpful, do your own homework to find a charity that accepts vehicles and boats on a donation basis.
Researching the charity
By all means, research the charity you are considering. First, be certain to choose a charity that has been approved by the IRS as a 501 (c) (3). To find one, the IRS publishes A Donor’s Guide to Vehicle Donations.
Furthermore, in the internet age, you can get information on virtually anything and anyone. Call the charity and ask them what they normally do with donated motor vehicles. Now, here’s where their answer can affect your tax deduction.
For instance, find out if the vehicle will be resold for cash or given to a needy family without a car.
- If they resell the vehicle, you are only allowed to deduct the amount the vehicle sells for, which in many cases may be below the fair market value.
- If the vehicle is kept by the charity for its own use or it is given to a needy family to use, you can deduct the full market value of the vehicle.
As with any charity donation, the IRS will require proper documentation as proof of your gift. Therefore, be sure the charity gives you a receipt detailing the exact amount the charity valued the vehicle at or the amount it was sold.
Transferring the title
This is where some donors go wrong. Don’t assume the charity will do it for you. Transfer the title as soon as the charity picks up the vehicle or you drop it off. Have all the paperwork you need, sign it over to the charity and head directly over to your nearest DMV office.
Make sure the title is “clean”. In other words, there shouldn’t be any unpaid parking tickets or other encumbrances attached to the vehicle. Keep a detailed paper trail because you’ll need proof of having made the donation along with a copy of the title transfer.
Canceling your insurance
Once the vehicle has changed hands and the title transferred, call your car insurance company and cancel the insurance coverage. Most state DMVs issue a Notice of Transfer of Title that release the previous owner of the vehicle (you) from liability, which can then be used to let your insurer know that the vehicle was donated and the insurance should be cancelled.
Be a stickler for detail
The IRS expects you to show proof of everything, so don’t be afraid to be a stickler for detail when donating a vehicle to charity. Keep a record of the transaction with complete paperwork and file the correct forms to take full advantage of your tax deduction. The more copies and receipts you can provide your accountant with, the better off you’ll be.