In the past, you could donate an automobile, boat, or plane to a charitable organization and take a charitable contribution deduction on your tax return equal to the vehicle's fair market value. However, a General Accounting Office report found that many taxpayers were overstating their vehicles' values, resulting in a $654 million loss of income tax revenue in 2000. Thus, the tax rules were tightened as of January 1, 2005.
Now, the amount of your deduction depends on how the charitable organization uses the vehicle. If it uses the vehicle for its charitable purpose or makes improvements to the vehicle, you can still deduct the vehicle's fair market value. However, if the charity sells the vehicle, your deduction is limited to the sale's price.
The new rules also include strict substantiation rules for donations over $500. Within 30 days of donating the vehicle or the sale of the vehicle, the charitable organization must provide you with a written acknowledgement including your name, taxpayer identification number, and the vehicle identification number. If the vehicle is sold, the acknowledgement must also state that the vehicle was sold in an arm's length transaction, indicate the amount of the sale's proceeds, and inform you that your deduction is limited to the sale's proceeds amount. This acknowledgement must be attached to your tax return to substantiate your deduction.
Be aware that should the charity sell your vehicle for less than $500, you still may be able to claim a $500 deduction, provided the vehicle's fair market value is at least that amount. The $500 deduction is allowed when the charity gives away or sells a vehicle for substantially less than market value, provided it was done as part of the charity's mission to help poor people who need transportation.
Based on these new rules, you may find it more advantageous to sell the vehicle yourself and make a cash contribution to the charitable organization.