Car Donation and the Gross Proceeds Tax Deduction Limit

Before 2005, there was no such thing as the "gross proceeds tax deduction limit" when someone would donate a car to charity and use it as an IRS tax deduction. People had always cited the tax deduction as a reason to donate a used car rather than sell it. The gross proceeds limit has become somewhat of a spoiler to those individuals who were donating cars just for the tax deduction alone! The good news is that overcoming the gross proceeds hurdle is not necessarily an obstacle that can not be overcome. The bad news is the fact that getting past the gross proceeds rule requires documentation.

In fact, there is so much paper work involved that you will likely need to keep this article bookmarked as a reference tool.

CAR DONATION

Before we begin, let's explain how the gross proceeds tax deduction limit works. Due to the gross proceeds rule, whenever you donate a car, you will be able to deduct no more than the amount that the donated car earned at the charity's auction - or 0 - whichever amount is less.

The usual amount that a donated car pulls in at auction is between 0 and 0. But, until recently, whenever a donated car sold for more than 0 at auction, we had the ability to claim the full amount as a tax deduction. Now, our deduction can be no more than 0, regardless of the amount the donated car went for at auction.

However, like any rule, there are exceptions to this one too.

Scenario #1: You have donated your car to a charity that intends to use it themselves to carry out specific tasks or services. For example, you donate your used car, one that is in decent condition, with decent mileage, to a neighborhood elderly care center. You could have sold it and profited but you are aware that the organization needs a car to deliver hot lunches to seniors who are confined to their home and unable to navigate life very well on their own. With elderly grandparents of your own, you just want to do something good hearted.

In this case, you may actually be eligible to claim the full value of the vehicle as a tax deduction. It requires a letter from the charity that you donated your car to. This letter must state that the receiving charity will be using the vehicle for a specific purpose. Their use of the vehicle must be thoroughly explained.

Scenario #2: The charity organization would like to give your donated car to a man in need of a vehicle to visit daily with his ailing wife at a care home. The charity needs to write a statement or letter thoroughly explaining that the donated car is going to an individual in need.

Scenario #3: The charity donation receiving your donated car feels the need to make material improvements to the vehicle. Material improvement is best defined as correcting anything that seriously compromises use of the vehicle and makes it unsafe. For instance, the replacement of a severely cracked windshield falls under this category. It is damage that could impair visibility, potentially harming the operator of the vehicle, any passengers and anyone sharing a road with them.

In this scenario, the charity organization must clearly explain what improvements the donated car needs and why they are imperative. They must also promise to not sell the vehicle until these improvements are complete.

Car Donation and the Gross Proceeds Tax Deduction Limit

Pamella Neely writes about donate car to charity tips and procedures to help people donating a car get the best tax credit and give the most to the people who need help.

CAR DONATION