Donating A Car To CharityDonating a car to charity is not that difficult. However, you need to be aware of the new tax regulations before you donate your car to a non-profit organization. The IRS provides some general rules of thumb on car donations:

Starting in 2005, if the claimed value of your donated car exceeds $500 and the item is sold by the charitable organization, your tax deduction is limited to the amount of money the charitable organization actually receives from selling the vehicle.

The charitable organization must provide you (the donor) with a written acknowledgement within thirty days of the sale, specifically stating the net amount they received for selling your donated car.

As an example, let's say you make a car donation to a non-profit charity, and the fair market value of that car is $5,000. The charity then sells the car without "significant use" or "material improvement", for a total sale price of $2,500. Your deduction is limited to $2,500, not the $5,000 fair market value.

This is substantially different than earlier years when you could deduct the entire estimated fair market value instead of the amount that the car donation actually raised for the charity.

Another caveat is that many non-profit organizations use a third-party administrative service to handle the pick-up and auction sale or your car donation. The resulting administrative fees are often 20% or more of what the car sells for at auction.

Your tax deduction is correspondingly lowered by the amount of third-party fees because the net amount the charity receives has been reduced. In the example above, your car donation deduction would be reduced from $2,500 to $2,000.

There are a few exceptions to these car donation tax deduction rules of thumb that are recognized by the IRS.

Car Donations: "Significant Use" & "Material Improvements" If the charity significantly uses or materially improves the vehicle, they must certify that in the form of an acknowledgement to the donor (within 30 days of the contribution). In the case of significant use or material improvement, the donor may usually deduct the vehicle's market value ($4,000 in the example above).

To be considered "significant use", an organization must use the vehicle to substantially further its regularly conducted activities. The recipient organization's use of the vehicle:

1 - Must not be insignificant 2 - Must not be intended at the time of the donation

Significance also depends on the frequency and duration of use by the non-profit organization.

"Material improvement" includes major repairs or other improvements that significantly increase the vehicle's value. Cleaning the vehicle, minor repairs, and routine maintenance are not material improvements.

Make sure you don't get misled by a car donation sales pitch saying you can claim higher tax deductions than the IRS allows.

For more information, see IRS Publication 561, Determining the Value of Donated Property ( PDF 101K) at www.irs.gov