Rather than sell your car or trade it in, did you know you could get a tax deduction for donating your vehicle? In the year 2000, an estimated $654 million were saved by taxpayers when they deducted their vehicle donations on their tax returns. Tax laws changed in 2005, restricting the amount you can write off, but donating a vehicle is still often to your advantage. If you donate a car, you may get a deduction that matches what you'd get if you sold it.

Whether you plan to give away an old junk car, a functional used auto or a pampered luxury vehicle, you need to know how to get the maximum tax deduction. Here are the rules for donating a car to help you dot all your "i"s and cross all your "t"s with the taxman.

Here's a summary of what you'll need to do if you donate your car with an eye for getting a tax deduction. Follow the links to get more details on each step:

• Make sure you qualify for the deduction.
• Research and pick a charity.
• Learn the fair market value of your car, truck, boat, motorcycle or other vehicle.
  
• Donate the car to a charitable organization.
  
• Make sure you receive the tax voucher (also called the tax receipt or written acknowledgement).
• File your taxes, being sure to itemize your deductions.

• Some states also offer a small tax credit for an auto donation to qualified organizations. Contact your state's department of revenue for details.

To qualify for the deduction, donate your car to a "qualified organization" with 501(c)(3) status, as laid out in IRS publication 78. See Charities That Accept Vehicle Donations (Car, Boat, Truck) for more information.

First, you'll need to itemize your deductions on Schedule A of Form 1040.

If you plan to claim $250 or greater in tax deductions for a car donation, then you'll need written documentation from the charity including:

• the name of the charity
  
• the make, model, and year of the car
• a statement by the charity specifying what, if anything, it gave you in exchange for the car
  

If the value of the deduction is greater than $500, you will file the written acknowledgement (Copy B of Form 1098-C) or in its place, the document provided by the car donation program, as well as IRS Form 8283 (Noncash Charitable Contributions) along with your return.

If the value of the deduction exceeds $5,000, you must also fill in and file Section B of Form 8283. You will also need a qualified written appraisal of your car.

All written acknowledgements can be either as a paper copy or electronically.

Refer to the appropriate IRS form instructions as to whether or not you need to file the written acknowledgement or keep it for your records. As of this writing, for vehicle contributions between $250 and $500, you just keep the return in your files.

After you donate the car, you'll receive a document--a tax receipt--from the vehicle donation program.

In addition, in order to get a tax deduction after you donate a car worth more than $500, you must receive more detailed written acknowledgement from the organization to which you donated it. This document will likely be IRS Form 1098-C, called "Contributions of Motor Vehicles, Boats, and Airplanes." Or the charity may use its own wording.

How do you determine the value of your car to see if it is less or more than $500? The value of your car will either be listed as the fair market value or as the amount it was sold for. To figure out whether or not your car's value exceeds $500, see What is the Fair Market Value of My Car?

If the value of the car is above $500, the information on this tax voucher will include:

• your name and tax ID number (usually, your social security number)
• the date you donated the car
• the VIN (vehicle identification number) of the auto

Along with your SSN, the VIN and the date mentioned above, the document will certify one of the following:

• that the charity didn't "buy" the car from you either by giving you anything or offering a service.
• if the charity did offer goods or services to you, how much that was worth
• if the organization did "pay" you in some way, that it was only in the form of "religious benefits."

If the charity uses the car--by fixing it up and using it within the organization, or by giving it away (or selling it at a price well below fair market value) to a family in need, for example--then the written acknowledgement will be sent by the car donation organization within 30 days of your donating it. The document must specify:

• that the donated car will be, or is being, used
• how it is being used and for how long
• what was fixed or upgraded
• that the auto won't be sold or traded before the end of the period of its use or material improvements.
• if given or sold directly to a needy family, that the gift or sale is in "direct furtherance of the charity's charitable purpose" or alleviating the distress of the poor who need a means of transport.
  

If the charity sells the car as is--which happens far more frequently--then it must send you documentation within 30 days of the sale asserting:

• the date of the sale
  
• that the religious or charitable program sold the car in "an arm's length transaction between unrelated parties"
• how much was received for the car
• that your deduction cannot be more than how much was received for the car

Note: If the vehicle sold for $500 or less, then you can only claim a deduction for either the amount of the car's value when you donated it or $500, whichever is less, as long as you get a written acknowledgement. So if you determined your car's "fair market value" was $2,000, and the car sold for only $425, then the most you can deduct is $500.

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