Question

Steve is considering donating his personal car, a red Ford Mustang, to a qualified charity. He purchased it for $7,000 5 years ago but it has a fair market value of $12,000. The charity would sell the car and use the proceeds to help sick children. What amount would Steve be able to claim as a charitable contribution deduction if he donates the car?

(In response to comment for more info) There is no depreciation rate, the fair value has actually gone up, regardless this information is not needed for this problem and neither is the market interest rate.)

Answer 1

As per IRS rules, only donations to qualified charities can provide tax deduction. It should be recognized by the IRS as a 501(c)(3) organization or a religious organization. In the given question it is stated that Steve wants to contribute to a qualified charity. Hence, he is eligible for tax deductions.

Generally, such persons are eligible to deduct the selling price at which the charity sells the car. However, only under the following exceptional circumstances the FMV shall be allowed as deduction as per IRS rules:

1. When a charity auctions your car for $500 or less, you can claim either the fair market value or $500, whichever is less.

2. When the charity intends to make "significant intervening use of the vehicle." This means the charity will use the car in its work.

3. When the charity intends to make a "material improvement" to the vehicle, not just routine maintenance.

4. When the charity gives or sells the vehicle to a needy individual at a price significantly below fair market value.

The above points are not satisfied since the charity is planning to sell the car for the purpose of helping sick children. Therefore, Steve can claim the amount at which the car would be sold by the charity as tax deduction ie, the selling price of the car would be the deduction available for him.