Military Finances 301: Donating a Car (or Boat) and the Tax EffectsTaxes
I found over most my career that military members are pretty generous. And based on the questions I get from clients; I think that charitable intent carries on into the retirement years of Senior Military Officers and NCOs. One of the more complicated ways to support charity is by donating a car or boat (or other vehicle).
Best Financial Choice
I often get asked, “Is it better to donate my car or sell it?” From a purely financial standpoint, it is better to sell your vehicle. The most you can ever deduct for a donated vehicle is the Fair Market Value (FMV) of the vehicle on the date of donation. You will reduce your taxes by some percentage of that FMV. At the Federal level the maximum tax rate is 37%. Add in around 5% of State income tax and you’ll reduce your taxes by about 42% of the FMV. So, if you can get around 45% of your FMV (you should be able to get close to 100% of the FMV), you’ll put more money in your pocket by selling the vehicle.
Best Financial Choice if Donating is Already Decided Upon
If you decide that you want to donate the vehicle even though you know it isn’t the best financial decision, you can maximize the amount of your deduction. It depends on what the charity does with your vehicle. As mentioned above, the maximum you can deduct for the vehicle is the FMV. You get that amount if the charity does one of three things.
- Gives or sells at a deep discount to a person or family as part of charitable purpose
- The charity uses the vehicle to conduct operations
- The charity makes “material improvement” to the vehicle
For example, if you donate a car to a charity and the charity gives the car to a needy family, that meets its charitable purpose. On the other hand, if the charity sells a boat you donated and uses the money to support its charitable objective, you can only deduct what the charity receives as a result of the sale. You can anticipate that the charity will sell a donated vehicle for less than the FMV. They need the money to support operations.
There is one special case. If your vehicle is sold by the charity for less than $500, you can deduct $500 or the FMV, whichever is less. In other words, if your vehicle has an FMV of $700 and the charity sells it for $350, you can deduct it for $500. If the FMV is less than $500 you can claim the FMV regardless of what the charity sells the vehicle for.
A Couple of Other Things to Keep in Mind
In order to gain a tax savings from the donation, you need to itemize your deductions. Under the Tax Cuts and Jobs Act, it might be to your benefit to take the standard deduction as it is higher than your combined deductions.
If the vehicle is sold, the charity should give you a 1098-C documenting the sale. Make sure you ask for one.
As with all charitable deductions, the charity must be qualified (a 503(c) charity).
Military Finances Are DifferentWhile this part of the tax code applies to all taxpayers, there are sections of the Tax Code that only apply to military members. And these special military or veteran tax preferences can affect your overall financial plan. We think you should work with an advisor that works on military financial issues each and every day. If you’d like to chat, give us a call.
If you found this article useful, you might like the following blog posts:
Military Finances 301: Tax Efficient Support to Charity
How Military Officers Can Avoid Charity Scams
Tax Relief for Children Receiving SBP Payments