Charity car can bring lots of happiness to needy family and the person who makes charity car donation as well. Not only the donated charity cars give a personal satisfaction but also a financial benefit in terms of tax deduction. For getting tax benefit, one of the major step is determining the value of the charity car which names Fair Market Value (FMV).
What is Fair Market Value (FMV)?
The maximum amount that we can deduct on our tax is fair market value of charity car which is the price, buyer pays and the owner accepts for charity car. Some charity organizations claim mistakenly that donor can deduct full value of the charitable car donation which “Blue Book” determines but this is a big mistake. You can start with used car guides like blue book but you should pay attention to IRS considerations:
- These guides (Kelly Book) are not official but they do give you clue for estimating charity car in your area.
- You have to consider the private party sale price not the dealer and only if the charity car is same model, physical condition, year build, mileage of the blue book listed car which has been sold in your area then IRS would accept it.
- It is important for IRS that guides like blue book you intend to use, how frequently updates. weekly, monthly, seasonally.
Example: You donate used car to charity which the dealer retail value for this kind of charitable car in your area with same condition is $2000 according to blue book but the private party sale price is $1200. The fair market value according to IRS is 1200$.
If donors instead of fair market value overstate charity car value then would be reliable for penalty:
- 20% penalty: 20% of the amount overstatement if the your claim on tax return is 150% more than correct amount or your overstatement is more than $5000.
- 40% penalty: if your claim on tax return is 200% more than correct value or your overstatement is more than $5000.
Another way for evaluating the charity car is car auctions. A third party would take care of the charity vehicle auction, takes portion of proceeds and pays the rest to the charity. But charity car auction has become a challenge between donors and government.
Donors donate cars and claim a fair market value tax deduction while the charity car is auctioned at a very low price compared to the fair market value thus the charity receives very low percentage of the value claimed for tax deduction and this is unacceptable for IRS. This ambiguity has leaded the government to change the rules about giving tax deduction on auctioned charity car value. For more details, read charity car auction.
The new decision of government will surely kill the car donation programs. The donor would not be sure of the value that he will get a tax deduction for his donated charity car. And because of the doubts existing lesser people would be willing to donate cars. The charities will get lesser donations in the process.
The charity auction dealers will be out of business. The tax deduction is a great motivator for most people opting to donate cars to charity. A change in the clause that goes against the charity car donors will only lead to lesser people opting for vehicle donations.