Here's How to Donate Your Car for Maximum Tax Benefits

It might seem a bit more difficult to donate your car than money or other property. And it's true that there are a few extra steps. After all, you can't simply drive your old car to your favorite charitable organization, hand your keys over to a staff member, and take a tax deduction.

However, the process isn't as complicated as you may think, and you might be surprised at how much of a deduction you can get for your old car.

Steps to donate your car and get maximum value

With that in mind, here's a quick step-by-step guide to the vehicle donation process to help get you started.

Find a qualifying charity

You may have seen or heard commercials from organizations that handle car donations to charity, but it's important to realize that many of them are for-profit companies that act as intermediaries. On the other hand, if you donate your vehicle directly to a charity, you can make sure that 100% of the proceeds from the car benefit that nonprofit organization.

Many major charities have their own vehicle donation programs, so start your research with some of your favorites. Habitat for Humanity is one example, and it has raised more than $30 million in the past five years alone from vehicle donations. If you have a specific cause you'd like to support, check whether a reputable charity with that focus area will accept a vehicle donation. Many will even pick the vehicle up for free.

Get your paperwork right

There are two major types of paperwork involved with a vehicle donation -- the documentation on the vehicle itself and the documentation you'll use to claim a tax deduction. We'll go through the latter in a bit.

When it comes to the vehicle's title, sign the car over to the charity itself. You don't legally have to do this, but until someone else is listed on the title, the vehicle is your responsibility. Some charities will ask you to leave the name blank, but this isn't a wise idea.

Use the correct valuation

In most cases, the charity will quickly re-sell your vehicle (usually at auction). Typically, you'll receive a written receipt that tells you how much the car sold for, and this is the amount you should use as a tax deduction.

On the other hand, there are a few cases where you can use the vehicle's fair market value (FMV), which you can find in a guide such as Kelley Blue Book. Fair market value is typically more than your car will sell for, especially at an auction. However, be sure that one of these applies before using it:

• The charity keeps and uses your vehicle for its own purposes.
• The charity makes substantial improvements to the car before it sells it.
• The car is sold at a discount, such as to help a low-income family get a vehicle.
• The car is worth less than $500.

Keep all of your documentation in order

Donations of non-cash items are highly scrutinized by the IRS, and that's especially true if they are relatively high compared with your income (which is often the case when you donate a car). While you should absolutely deduct every penny to which you are entitled, it's very important to make sure you have the proper documentation.

When you donate your car, there are three "tiers" of documentation you could potentially need:

• If your car is valued at $250 or more, you'll need written documentation from the charity acknowledging the receipt of the vehicle.
• If it is worth more than $500, you'll need to complete section A of IRS Form 8283 when you file your tax return.
• If the vehicle is worth more than $5,000, you will need to get an independent appraisal to document it, and will need to complete section B of that IRS form as well.

Should you donate your car?

Donating your car to charity can be a win-win situation. The charity can get a nice payday once it sells your car, and you get a tax deduction that can be significantly higher than the trade-in value of your vehicle and get to support a favorite cause without dipping into your savings account. However, be sure to do it the right way if you opt to donate your car.