The only time you can claim a tax deduction for giving your car away is when you donate it to a charity or other tax-exempt, IRS-qualified organization. If you give the car away to a friend or family member, a tax deduction isn't available. And you may end up owing a gift tax on the transfer.
Fair Market Value
Once you find a charity to accept your car donation, calculating the deductible amount requires some additional work. Initially, estimate the fair market value (FMV) of your car, which is the price buyers are willing to pay for it in your area. The IRS recommends that you reference a used-car price guide, such as the Kelley Blue Book (kbb.com), to look up its resale value. However, you must only reference the private-party price and not the retail price that dealers use. In addition, you must choose the value that reflects the overall condition of your car.
Calculating the Deduction
In many cases, it may not be possible to claim a deduction for the car’s FMV. This is because the IRS requires that you use the smaller of two prices: the price the charity sells the car for, if more than $500, or the fair market value you estimate. The charity has an obligation to report the sale proceeds to you on Form 1098-C, so keep this document for your tax return. However, the IRS provides exceptions to this requirement if the charity sells the vehicle to a needy person at a discount or makes substantial improvements to the car prior to the sale. If either of these situations occurs, deduct the fair market value of the car instead.
If instead you choose to give your car away to a friend or family member, you cannot claim a charity tax deduction for it. You may, however, incur a gift tax liability for the car. The federal gift tax rules impose a tax on the value of cash and property you give away, including gifts of cars. However, the Internal Revenue Code provides for an annual exclusion, which is the maximum amount of tax-free gifts you can make to a single recipient each tax year. To ascertain whether your car gift is taxable, evaluate whether its fair market value exceeds the exclusion amount. For example, if you estimate the car's value at $10,000 in 2011, when the annual exclusion is equal to $13,000, you have no tax reporting or payment obligations.
Reporting Vehicle Gifts
The IRS requires that you report all “taxable gifts” on Form 709 in the year you make the gift. To illustrate, if the car’s FMV is $20,000, the transfer results in a $7,000 taxable gift after reducing the value for the annual exclusion. At this point, you can either calculate the gift tax on $7,000 or elect to use part of your $1 million unified credit to eliminate the tax.
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.