Say you donated your $1,000 station wagon to a food bank. Instead of immediately selling it, the group used the auto for several months to deliver meals and other food items to needy families. Eventually, the organization decided to sell the vehicle for $800. In this case, you could still claim the full $1,000 fair market value of the auto as long as you received documentation from the food bank on not only the sales price, but also how the auto was used for nonprofit works before the sale. Under the IRS regulations, this is classified as "significant intervening use" of the vehicle that allows the taxpayer to claim the higher deduction.
Other examples of IRS-accepted intervening use are a donated auto used by a charity to transport clients to doctor appointments or a car given to a vocational school that used it in its automotive repair classes.
The IRS says a donor also can claim a fair market value deduction if the charity makes a material improvement to the vehicle. This, according to the tax agency, means major repairs that significantly increase the auto's value. Material improvements do not include finish work (such as painting, waxing or rust proofing), dent or scratch removal, installation of theft-deterrent devices, or the cleaning or repair of upholstery.
Break for bargain-basement sales
What if the charity immediately sells your donated station wagon, but for a mere $300?
Scharin says don't shortchange yourself. Under the new auto-donation rules, you might be able to claim a $500 deduction even though the charity sold your auto for $200 less.
The IRS says this larger deduction allowance is OK in cases where a charity sells a donated vehicle at a price significantly below market value, or even gives it away to a needy person, as long as it's done to further the charity's mission of helping a poor person who needs transportation.
Be careful here. Make sure the vehicle did indeed go to a needy individual. Shortly after the vehicle donation rules changed, the IRS discovered that some charities sold autos at auction but reported that the sales -- at prices well below market value -- were to disadvantaged buyers, to trigger the exception that allows the donor a higher deduction amount. If the IRS discovers such false reporting, it could totally disallow your donation and deduction.
Also keep in mind that regardless of how a charity disposes of your donated vehicle, your deduction cannot exceed the value of your donation. So if you donate a clunker worth $150, says Scharin, that is the amount you can deduct even if the charity gives the auto away.