Donate your car or junk it? How the tax deduction works

Car donation ads make it sound like a free tow plus a tax break. The tow part is often true. The tax break is the part that needs a closer look, because it only exists for some people and it’s usually smaller than the car’s “value.” We buy junk cars through suburban junk car pickup, so we have a side in this. We’ll give you the IRS rules straight, and you can do the math yourself.

Everything below comes from IRS Publication 4303, A Donor’s Guide to Vehicle Donation. The current edition is the January 2015 revision. It’s short, and worth reading if you’re leaning toward donating.

The one question that decides it: do you itemize?

The IRS is blunt about this: you can deduct contributions to charity only if you itemize deductions on Schedule A of Form 1040.

If you take the standard deduction, a donated car doesn’t reduce your federal income tax at all. Not by a dollar. You’d be giving the car away for the good feeling (which is a perfectly fine reason) and a free tow.

If you’re not sure whether you itemize, look at last year’s return or ask whoever prepares it. That single answer settles most of this article.

How much the deduction is worth when you do itemize

People often assume they’ll deduct what the car is “worth.” For most donated cars, that’s not how it works.

When the charity sells the car

Charities typically sell the cars donated to them. When that happens, your deduction is generally limited to the gross proceeds of the sale, not what you think the car was worth.

The IRS gives this example. You donate a car you’d valued at $4,300. The charity sells it for $3,700, without using or improving it first. Your deduction may not exceed $3,700.

When the car sells for $500 or less

If the charity sells the car for $500 or less, you may deduct the lesser of the car’s fair market value on the day you donated it or $500. In the IRS example, a car that sold for only $400 produced a deduction of no more than $500.

That’s the realistic case for a true junk car. A car that doesn’t run, has body damage or has been sitting for years usually doesn’t sell for much at a charity auction either.

When you can use fair market value

There are three exceptions where the gross-proceeds cap doesn’t apply and you can deduct the car’s fair market value:

1. Significant intervening use: the charity uses the car in its work before selling it (the IRS example is a charity using a car daily for a year to deliver food).
2. Material improvement: the charity makes major repairs that increase the car’s value before selling it.
3. Sale or gift to a person in need: the charity gives or sells the car, well below fair market value, to someone who needs transportation, as part of its charitable purpose.

The charity has to certify the exception in writing. And fair market value still has limits: it can’t exceed a pricing guide’s private-party price for a car of the same make, model, year, condition and options. In one IRS example, a guide said $1,600, but the car needed extensive repairs and the owner could only have sold it for $750. The fair market value was $750.

What the deduction saves you in real money

A deduction lowers your taxable income, not your tax bill dollar for dollar. So the tax you save is the deduction times your tax rate.

Say you itemize and your top federal rate is 22 percent. A junk car that a charity sells for $400 gives you a deduction of up to $500. At 22 percent, that’s at most $110 off your federal tax, and you only see it when you file for that year.

Now compare that with a junk car offer. You get the offer before you commit, towing is free, and you’re paid at pickup. There’s no waiting for a tax season and no need to itemize. For a car that’s truly junk, the cash offer and the tax savings can be close, or the cash can win outright. Run both numbers before you decide.

	Donate to charity	Junk it with us
What you get	A deduction, only if you itemize	An offer, paid at pickup
Size	Usually capped at the charity’s sale price	The number we quote, agreed before pickup
When you see it	When you file your taxes	The day the car is collected
Towing	Ask the charity	Free
Paperwork	1098-C or charity letter, Form 8283 over $500	Title, or the papers we confirm on the call

The paperwork a donation needs

If you do donate, keep the paper trail tight. Publication 4303 lists:

• A written acknowledgment from the charity for a deduction over $500. The charity can use Form 1098-C or its own statement. You need it within 30 days of the car’s sale, or within 30 days of the donation if one of the exceptions applies.
• Form 8283. For a deduction over $500 up to $5,000, complete Section A and attach it to your return. Over $5,000, complete Section B, which needs the signature of an authorized official of the charity.
• A written appraisal from a qualified appraiser if you’re deducting more than $5,000 and the deduction isn’t limited to the sale price.

And check the charity first. The deduction only works if the organization is a qualified one, usually a 501(c)(3). The IRS publication points to its online charity lookup (it calls the tool EO Select Check) and notes that churches and other houses of worship often aren’t listed even though they qualify.

Plates and title when you give a car away in Illinois

The IRS advises two things on the vehicle side. First, take responsibility for the title transfer yourself, because state charity officials generally recommend it to end your liability for the car. Second, remove the license plates before donating unless state law says otherwise.

In Illinois the plates stay with you, not the vehicle, so that one is easy: take them off. The same goes if you sell the car for junk. The seller signs the title over to the buyer and keeps the plates, and the title has a detachable notice-of-sale section you can mail to the Secretary of State so you’re on record as having sold it.

So which should you do?

Donate if you itemize, you want to support a specific charity, and especially if the charity will use the car or give it to someone who needs it, since that’s when the deduction can reach fair market value.

Junk it if you take the standard deduction, if the car doesn’t run or has been sitting (it’ll likely sell for little at auction, which caps your deduction), or if you’d simply rather be paid now. A car that’s been parked since the tags ran out is the classic case.

Tax situations vary, and we’re not tax advisers. If the deduction matters to your decision, confirm with whoever does your taxes before you sign anything over.