Donating your old car for a tax deduction
By Bankrate.com

The old jalopy just won't cut it any longer. It runs, but barely. And you're tired of the disapproving looks you get from the neighbors every time you turn into the neighborhood. So you've made the decision to get another car.

But don't automatically trade it in. Your old auto could be a tax break.

Many people are familiar with donating clothing and household items to Goodwill and the Salvation Army. But did you know that a handful of organizations are waiting patiently for auto donations? These groups will gladly let you unload a car you no longer want, giving you a hefty tax deduction.

Several years ago, Michelle Passoff of New York City eagerly donated her 1980 Honda Civic: "The cost of fixing it was greater than the value of the car."

After spotting an advertisement in the back of AAA Magazine for a charitable organization, she called the 800 number to donate her car. "They said that they break the car into different parts and sell the parts, and the money goes to children's charities."

Passoff claimed a $1,000 tax deduction on her return. "Donating a car is easier than getting rid of your Chinese food take-out cartons," she insists. After her toll-free call, the organization arrived within two hours to pick up her auto.

Of course, Passoff's donation was before the rules changed. It's still easy to give away a vehicle and many organizations still will quickly come to take the jalopy off your hands. But the amount you can deduct might not be as much as you expect.

Say you donate a vehicle you believe is worth $1,000 and can substantiate that fair market value by checking a widely used guidebook such as National Automobile Dealers Association, the Kelley Blue Book or Edmunds.

Under the old rules, that would be the amount you could deduct. But now, it could be less depending on what the charity does with the vehicle. If, for example, the charity turns around and sells your donation for $800, your deduction is limited to the lower sales price.

Benefits of donating a car
Still, you might find that donating your car is the preferable option for your situation. Some benefits cited by both organizations that take vehicles and people who've given away autos include:

" It's hassle-free; much easier than fixing, advertising and selling your car.
" Even with the new donation rules, your tax deduction still might be worth more than you'd receive by selling the car.
" You don't need to pay someone to tow it or give it away to a salvage yard.
" It supports a worthy cause.

But watch out: not all organizations claiming to be charitable have been approved by the Internal Revenue Service as a nonprofit charity. You can deduct your car contribution only if you make it to a qualified organization.

So how do you know if the organization is qualified?
1. Ask the charity if the IRS has qualified it.
2. Read the charity's literature to ensure that it is fully recognized by the IRS.
3. Check IRS Publication 78, which lists most qualified organizations.

"Ask the organization to show you the letter from the IRS that gives them the tax-exempt status," says Art Wiederman, CPA and President/Owner of Wiederman and Associates in Tustin, Calif.

"Stick with traditional organizations that you're familiar with -- like the American Cancer Society or your church," advises John Hewitt, CEO and President of Liberty Tax Service, based in Virginia Beach, Va.

The donation process
Ready to donate an old auto? First, make sure you have title to the vehicle. Also, the title must be lien-free. Leased cars aren't valid donations.

In order for your car donation to qualify as a deduction on your taxes, you must transfer your clear title to the organization. The organization will probably ask you to mail it to them. As long as your title is postmarked by Dec. 31, you'll get the tax deduction for that year.

After you send in your title, the organization should contact you to arrange for your car's pickup -- which generally takes about a week. Remember to remove the license plates and other personal items before your car gets taken away.

Itemize your deduction
If your primary motivation in donating a car is to gain a tax deduction, remember that you'll need to itemize your deductions on your federal and state income tax returns. That means filling our Schedule A and filing it with your Form 1040.

If your donated vehicle is the only deduction you can claim on Schedule A, you won't be able to deduct it because your itemized amount won't be larger than your standard deduction. And you always want to claim the largest deduction you're allowed.

Now that you have information regarding the process of donating your car, you just need to figure out who you'd like to give it to.

A handful of qualified organizations have forms that you can fill out online, such as the ones listed in the table. This is only a small sampling of the hundreds of legitimate organizations that will happily accept car donations.

-- Updated Dec. 20, 2005